THE  LIBRARY 

OF 

THE  UNIVERSITY 
OF  CALIFORNIA 

LOS  ANGELES 


TRUST   ESTATES   AS 
BUSINESS  COMPANIES 


BY 

JOHN  H.  SEARS 
f<* 


COUNSELORS  PUBLISHING  COMPANY 

ST.  LOUIS,  MISSOURI 


COPYRIGHT  1912 

BY 
JOHN  H.  SEARS 


ALL  RIGHTS  RESERVED 


ENTERED  AT 

STATIONERS'    HALL 
LONDON,  ENGLAND 


T 

Se. 


To  my  Mother 

this  book  is  affectionately 

dedicated 


PREFACE 

This  work  owes  its  appearance  to  the  wide  inter- 
est manifested  in  a  booklet  by  the  undersigned  entitled 
"  Effective  Substitutes  for  Incorporation".  This  per- 
suaded me  that  bona-fide  business  had  become  greatly 
discontented  with  corporations  as  supposed  exclusive 
agencies  for  the  employment  of  the  aggregated  capital 
of  numerous  investors.  One  of  the  most  conservative 
states  of  our  Union  upon  investigation  was  ascertained 
to  be  applying  another  idea  to  the  problem,  and  satis- 
faction therewith  was  growing  with  experience.  I 
thought  that,  if  this  idea  had  passed  beyond  the  experi- 
mental stage  in  Massachusetts  and  was  there  being 
developed  into  larger  usefulness,  very  probably  it  could 
be  applied  elsewhere.  My  investigation  showed,  as 
cases  hereinafter  prove,  that  the  principal  features  had 
been  used  in  other  states  and  our  mother  country  even 
before  their  employment  in  Massachusetts. 

The  book  endeavors  to  plant  itself  upon  those 
principles  of  jurisprudence,  which  have  governed 
Courts  of  Equity  in  their  enlightened  conscience. 
Therefore  there  will  be  found  herein  no  innovation  in 
doctrine,  but  a  mere  adaptation  of  old  principles  to 
modern  needs.  The  author  considers  that,  if  he  may 
be  thought  to  have  presented  those  principles  clearly 
and  marshalled  them  in  logical  order,  his  efforts  will 
achieve  their  greatest  success.  Upon  this  view  the 


work  is  submitted  to  the  kindly,   but  discriminating, 
judgment  of  the  profession. 

Gratefully  I  acknowledge  many  helpful  sugges- 
tions by  my  brethren  in  various  parts  of  our  country. 
Particularly  do  I  acknowledge  my  indebtedness  to 
Judge  Needham  C.  Collier  of  the  St.  Louis  bar  for  his 
assistance  throughout  the  entire  preparation  of  the 
work. 

St.  Louis,  September,  1912.  JOHN  H.  SEARS. 


TABLE  OF  CONTENTS. 

CHAPTER  I. 

EXPLANATORY. 
(References  arc  to  sections.) 

The  Purpose  of  this  Book §  1 

Not  Advocated  as  a  Method  of   Escaping  Legitimate 

Responsibilities  2 

Difficulties  of  Corporations  as  to  Changing  Statutes .  .  2a 

Distinction  as  to  Trust  Estates  in  Business 2b 

Personal  Responsibility  in  Corporate  and  Trust  Man- 
agement    2c 

Plan  of  Treatment 3 

CHAPTER  II. 

VARIOUS  METHODS  OF  ESTABLISHING  A  TRUST  ESTATE 
IN  BUSINESS. 

Trust  Estate  Embarked  in  Business  Created  by  Wills .  .  4 

Trust  Estate  Created  by  a  Single  Settlor  with  Himself 

and  Others  as  Cestuis  Que  Trust 5 

Trust  Estate  Created  by  Debtor  with  Himself  and 

Creditors  as  Beneficiaries 6 

Trust  Estate  Created  by  Debtor  with  Himself  and 

Creditors  as  Beneficiaries  (Continued) 7 

Trust  Estate  Created  by  Debtor  with  Himself  and 

Creditors  as  Beneficiaries  (Continued) 8 

Several  Persons  Originating  Trust  Estate  for  Their 

Proportionate  Benefit  9 

Trust  Estate — In  Pursuance  to  Articles  of  Association 

for  Unincorporated  Company 10 

Smith  v.  Anderson   Continued — Ruling  on   Appeal.  .  .  11 

Trust  Estate — In  Pursuance  to  Articles  of  Association 
for  Unincorporated  Company — Continued — Ameri- 
can Cases  12 

Summary    13 


viii  TABLE  OF  CONTENTS. 

CHAPTER  III. 

THE  NATURE  OF  A  TRUST   ESTATE. 

Status  of  Trust  Estate  Exemplified  by  Decisions....  §  14 

Rule  Where  Settlor  Creates  Trust  for  His  Own  Benefit  15 
Rule  Where  Settlor  Creates  Trust  for  His  Own  Benefit 

(Continued) 16 

Dry  or  Passive  Trust  Distinguished  From  Active  Trust  17 

Summary    18 

CHAPTER  IV. 

JOINT-  SETTLORS  CREATING  TRUST  FOR  THEIR  ENTIRE 
BENEFIT. 

Single  Settlor  Creating  Trust  for  Benefit  of  Himself 

and  Another  19 

Several  Settlors  Creating  a  Dry  Trust  for  Their  Own 

Benefit  20 

Several  Settlors  Creating  a  Dry  Trust  for  Their  Own 

Benefit  (Continued)  21 

Settlors  Creating  Active  Trust  for  Their  Exclusive 

Benefit  22 

Settlors  Creating  Active  Trust  for  Their  Exclusive 

Benefit  (Continued)  23 

Settlors  Creating  Active  Trust  for  Their  Exclusive 

Benefit  (Continued)  24 

Summary  25 

CHAPTER  V. 

LIABILITY  OF  TRUSTEE  OF  AN  ACTIVE  TRUST. 

Independent  Status  of  a  Trustee 26 

Independent   Status   of  a   Trustee    (Continued) 27 

Rule  of  Trustees'  Personal  Liability  Stringent 28 

Stipulation  Effective  Against  Personal   Liability 29 

Stipulation  Effective  Against  Personal  Liability   (Con- 
tinued)      30 

Stipulation  Effective  Against  Personal  Liability   (Con- 
tinued)      31 


TABLE  OF  CONTENTS.  ix 

Discussion  of  Above  Ruling §  32 

Liability  of  Trustee  for  Negligence  in  Management  of 

a  Trust  Estate 33 

Liability  of  Trustee  for  Negligence  in  Management  of 

a  Trust  Estate  (Continued) 34 

Liability  of  Trustee  for  Negligence  in  Management  of 

a  Trust  Estate  (Continued) 35 

Liability  of  Trustee  for  Negligence  in  Management  of 

a  Trust  Estate  (Continued) 36 

Summary  37 

CHAPTER  VI. 

TRUSTEE'S  RIGHT  OF  INDEMNITY. 

Preliminary  Observations  38 

Trustee's  Right  of  Indemnity 39 

Trustee's  Right  of  Indemnity  (Continued) 40 

Trustee's  Right  of  Indemnity,  Where  the  Indebtedness 

is  in  Tort 41 

Liability  of  Trust  Estate  Through  Indemnity,  as  Shown 

by  American  Cases 42 

Liability  of  Trust  Estate  Through  Indemnity,  as  Shown 

by  American  Cases  (Continued) 43 

Liability  of  Trust  Estate  Through  Indemnity,  as  Shown 

by  Other  American  Cases 44 

Summary 45 

CHAPTER  VII. 

LIABILITY  OF  TRUST  ESTATE. 
DIRECTIONS  CREATING  PRIMARY  LIABILITY. 

Liability  of  Trust  Estate  Where  Creating  Instrument 

so  Provides 46 

Liability  of  Trust  Estate  Where  Creating  Instrument 

so  Provides  (Continued) 47 

Embarking  Trust  in  Trade  as  Pledging  it  for  Debt ...  48 

Special  Contract  Relieving  Trustee  From  Personal  Lia- 
bility    49 

Summary   50 


x  TABLE  OF  CONTENTS. 

CHAPTER  VIII. 

CESTUIS  QUE  TRUST  OF  A  TRADING  TRUST. 
ENGLISH  DECISIONS. 

Unincorporated  Associations  §  51 

English  Decisions  as  to  Associations  With  Transferable 

Shares  52 

English  Decisions  as  to  Associations  With  Transferable 

Shares  (Continued) 53 

Summary  of  Above  Cases 54 

Transferable  Shares  in  a  Trading  Trust.' 55 

Scope  of  Opinions  in  Smith  v.  Anderson  on  Appeal ....  56 

Smith  v.  Anderson  (Continued) 57 

Smith  v.  Anderson  ( Continued) 58 

Summary  of  the  Lords  Justices'  Opinions 59 

Construing  These  Opinions  Through  Reference  to 

Former  Decisions  60 

Summary  61 

CHAPTER  IX. 

CESTUIS  QUE  TRUST  IN  A  TRADING  TRUST — CONTINUED. 
AMERICAN  DECISIONS. 

Shareholders  as  Cestuis  Que  Trust 62 

Other  Contributors  as  Cestuis  Que  Trust 63 

Creditors  as  Cestuis  Que  Trust 64 

Devisees  as  Cestuis  Que  Trust 65 

Summary   66 

CHAPTER  X. 

NONLIABILITY  OF  CESTUIS  QUE  TRUST  OF  A  TRADING  TRUST. 

Preliminary   67 

Liability  of  Trustee  to  Creditors 68 

Liability   of  Trust   Estate 69 

Nonliability  of  Devisees,  Cestuis  Que  Trust  of  a  Trad- 
ing Trust    70 


TABLE  OF  CONTENTS.  xi 

Making  Creditors  Cestuis  Que  Trust  by  Deed  of  As- 
signment         §  71 

Review  of  the  English  Case  Above  Alluded  to 72 

Contributors  Other  Than  Shareholders 73 

Nonliability  of  Cestui  for  the  Contracts  of  Trustee. .  74 
Nonliability  of  Cestui  on  Contracts  of  Trustee   (Con- 
tinued)     75 

Nonliability    of    Cestui    Que    Trust    on    Contracts    of 

Trustee    (Continued)    76 

Nonliability    of   Cestui   Que    Trust    on   Contracts    of 

Trustee    (Continued) 77 

CHAPTER  XI 

NONLIABILITY  OF  CESTUIS  QUE  TRUST  OF  A  TRADING  TRUST — 

CONTINUED. 

Shareholders  in  a  Trading  Trust 78 

Shareholders  in  a  Trading  Trust  (Continued) 79 

Liability   in   General   Aspect   of   Shareholders   in   Un- 
incorporated  Associations    80 

Summary  81 

CHAPTER  XII. 

RELATION  OF  SHAREHOLDER  TO  TRUSTEE. 

Preliminary   82 

Are  Shareholders  Partners  Inter  Sese? 83 

The   Massachusetts   View 84 

Rights  of  Cestuis  Que  Trust  Against  a  Trustee 85 

Cestuis  Que  Trust  Represented  by  Certificates  of  Shares  86 

Theory  of  Trustee's  Responsibility  to  the  Association . .  87 

Summary 88 

CHAPTER  XIII. 

PERPETUITIES  AND  RESTRAINTS  UPON  ALIENATION. 

Trusts  by  Settlors  for  Their  Sole  Benefit 89 

The  Nature  of  Perpetuities 90 


xii  TABLE  OF  CONTENTS. 

Suspension  of  the  Right  of  Alienation §  91 

Suspension  of  Power  of  Alienation  Must  be  Absolute.  92 

No  Suspension  Where  Settlors  Are  Sole  Cestuis 92b 

Power  of  Sale  With  Directions  to  Reinvest 93 

Directions    for   Accumulation 94 

Lawful  Period  of  Suspension  of  Alienation 95 

Provisions  for  Continuance  Beyond  Stated  Trust  Term  96 

Rule  Where  Restraint  is  Upon  Partition 97 

Summary    . ., 98 

CHAPTER  XIV. 

ACTIONS  BY  AND  AGAINST  THE  TRUSTEES. 

Trustee  of  an  Active  Trust  a  Principal  and  not  an  Agent  99 
Necessary     Parties     Defendant     in     Actions     Against 

Trustees    100 

Trustee  Sued  Alone  Where  Instrument  Gives  Trustee 

Full    Control    101 

Trustees  as  Plaintiffs 102 

Trustees  Suing  in  Foreign  Jurisdiction 103 

Constitutional  Right  of  a  Foreign  Trustee  to  Sue  in 

Another   State    104 

Trustee  of  Express  Trust  Distinguished  From  Statu- 
tory Trustee   105 

Action  Where  Trustee  Merely  Binds  Trust  Estate 106 

Actions  by  Cestuis  Que  Trust 107 

Conclusion    , 108 

CHAPTER  XV. 

TAXATION. 

Preliminary 109 

Excise  Taxes — Exemption  of  Trusts  From  Federal 

Corporation  Tax  110 

Trust  Taxable  to  Trustee  or  Beneficiary  and  Not  to 

Both Ill 

Taxing  Resident  Beneficiaries  of  Foreign  Trusts 112 

Massachusetts  Legislation  113 

Summary  114 


TABLE  OF  CONTEXTS.  xm 
CHAPTER  XVI. 

TRUSTEES  AS  MANAGERS. 

Preliminary   §  115 

Unity   of  Action  by   Trustees 116 

Provisions  for  Action  by  Less  Than  Full  Number. . . .  117 

Appointment  and  Tenure  of  Trustees 118 

Occasion  for  Appointment  of  Trustees 119 

Fixing  Terms  for  Trustees  and  Election  of  Successors  120 
Joint    and   Several   Responsibility    of    Trustees — Con- 
fidence Reposed    121 

Acts  and   Defaults   of   Co-Trustee 122 

Trustee  Seeking  Direction  of  Courts 123 

Special  Importance  of  Advisory  Power  as  to  Trading 

Trusts    124 

Question  Must  be  Substantial  and  Involve  Actual  Doubt  125 
Effect    on  Trust   Estate    of   Making  Application    for 

Direction    126 

Limitation  of  Corporate  Capacity  to  its  Domicile 127 

Trust  Estate  Distinguished  from  Corporation 128 

Constitutional  Protection — Trust  Estates  May  do  Busi- 
ness in  Foreign  States  and  Countries  on  a  Basis  of 

Common   Right 129 

Distribution  of  Earnings  of  a  Trust  Estate  in  Business.  130 

Trustees'  Compensation   131 

Trust  Instrument  Fixing  Amount  of  Compensation. . . .  131a 

CHAPTER  XVII. 

PROTECTION  OF  CESTUIS'  INTERESTS. 

Preliminary   132 

Status    of   Stockholders 133 

Examination  of  Books  and  Papers  by  Stockholder. .  . .  134 

Status  of  Certificate  Holders 135 

Relation  Between  Stockholders  of  a  Corporation  and  its 

Managers 136 

Cases  in  Which  Directors  Were  Held  Liable  to  Stock- 
holders      137 

Summary  138 


xiv  TABLE  OF  CONTENTS. 

Trustees  Selling  or  Purchasing  From  or  Dealing  With 
the  Trust  Estate — Interposition  of  Third  Parties 

or  "Dummies"    §  139 

Trustee  as  One  of  Cestuis 140 

Information  From   Trustees 141 

Reports  Required  by  Trust  Instrument: — Restraints  on 
Right  to  Information — Questioning  Motive  of  In- 
quiry    142 

Using  Shares  as   Collateral   Security 143 

Meetings  of  Certificate  Holders — Receipts,  Acquitances 

and  Waivers 144 

CHAPTER  XVIII. 

INVIOLABILITY  OF  TRUST  FUND. 

Preliminary   145 

Pursuit  by  Creditor  of  Trust  Fund 146 

Corporate  Assets  as  a  Trust  Fund 147 

Assignments  and  Preferences  by  Corporations 148 

Trust  Estates  not  Subject  to  Bankruptcy 149 

Unpaid  Subscriptions  to  a  Share  in  a  Trust  Estate ....  150 

Subscription  to  Corporate  Stock  Distinguished 151 

Conclusion 152 

CHAPTER  XIX. 

STIPULATIONS  IN  INSTRUMENTS  ESTABLISHING  TRUST  ESTATES 
IN  BUSINESS.  PRACTICAL  EXPERIENCE — GENERAL  DIREC- 
TIONS— PURPOSES — NAME — INSURANCE — TEMPORARY  IN- 
VESTMENTS. 

Practical   Experience  With  Trust  Estates  as  Business 

Companies  153 

Summary  of  Situation  as  Shown  by  Experience 154 

General  Directions  in  Trust  Agreements 155 

Unnecessary  Detail  in  Trust  Instruments 156 

Purposes  of  Trust  Estates  in  Business 157 

Adoption  of  Name  for  a  Business  Trust 158 

Stipulations  in  Trust  Instrument  as  to  Trustees'  Con- 
tracts .  159 


TABLE  OF  CONTENTS.  XV 

Insurance — Making  Trustee   Secure   Against   Personal 

Loss §  1GO 

Directions  as  to  Acts  by  Subordinate  Agents 161 

Temporary  Investments   by  Trustees 162 

CHAPTER  XX. 

STIPULATIONS  IN  INSTRUMENTS  ESTABLISHING  TRUST  ESTATES 

IN  BUSINESS — CONTINUED. 

CAPITAL — SHARES — PUBLICITY — INCUMBRANCES — 
TERMINATION  OF  TRUST — RECORDING. 

Corporate    Capitalization    163 

Capitalization  of  Trusts  in   Business 164 

The  Capital  of  a  Trust  Estate  in  Business 165 

Interests  or  Shares  in  a  Trust  Estate 166 

Preferred  Shares  in  a  Trust  Estate 167 

Publicity  of  Affairs  of  a  Trust  Estate — Reports — Ac- 
countings    

Mortgages  by  Trustees 

Amending  Trust  Agreements 

Voluntary  Termination  of  Trust  Estate 

Recording — Actual  and   Constructive    Notice 


xvi  TABLE  OF  CONTENTS. 

APPENDIX  OF  EXHIBITS. 

(References  are  to  pages.) 

Explanation    of    Exhibits 277-278 

Form  of  Declaration  of  Trust  Establishing  a  Real  Estate 

Company    279-285 

Form  of  Declaration  of  Trust  Establishing  a  Holding 

Company    286-300 

Form  of  Declaration  of  Trust  Establishing  a  Manufac- 
turing Company   301-320 

Agreement  Covering  Reorganization  from  Incorporation 

to  Trusteeship 321-325 

Form  of  Trust  Taking  over  Corporation 326-338 

Certificate  Without  Par  Value 339 

Plan  of  the  Merchants'  Bank  by  Alexander  Hamilton . .  340-347 
Form  of  Indenture  Securing  the  Payment  of  Notes  or 

Debenture  Bonds  of  a  Business  Trust 348-368 

Form  of  Minutes  of  Cestuis'  Meeting 369-370 


TABLE  OF  CASES. 


(The  references  arc  to  sections.) 


A. 

Ackenman   v.    Emott  162 

Adams   v.    Nelson  5 

Aiello   v.    Montecalfo  158 

Albright  v.  Albright  117 

American  Mining  &  Smelt- 
ing Co.  v.  Converse  49 
Anthony  v.  Caswell  111 
Ashley  v.  Winkley  87 
Attorney  General  v.  Cuming  117 
Augusta  v.  Kimball  ill 
Aven  v.  Beckom  28 

B. 

Bacon    v.    Board     of    Com- 
missioners 112 
Bailey   v.    Bailey  95 
Bailie    v.     Carojina     Inter- 
state   B.    &    L.    Ass'n.          169 
Baldwin     Fertilizer    Co.     v. 

Thompson  70 

Ballou  v.   Farnum  34 

Baltimore   v.    Stirling  112 

Baltimore       Appeal        Tax 

Court  v.   Gill  112 

Bank  v.    McLeod  105 

Bank  of  Augusta  v.  Earle  127 
Bank  of  Topeka  v.  Eaton 

12,    31,    47,   49,    68,    75,    99, 
146,    169,    172 

Barbour   v.    Cummings  141 

Barney    v.    Chittenden  117 

Barney   v.    Saunders  131 

Bascom   v.   Weed  117 

Beardsley  v.  Hotchkiss  92& 
Bernheimer  v.  Converse  104 
Berry  v.  Stigall  131 

Bingham  v.   Stewart  28 

Biscoe   v.   State  131o 

Blackstone    National    Bank 

v.  Lane  28 

Bloom   v.   National   Sav.    & 

Loan    Co.  136 

Bloom   v.    Wolf  28 

Board  of  Commissioners  v. 
LaFayette  M.  &  B.  R. 
Co.  136 

Board  of  Commissioners  v. 

Reynolds  136,    137 

Bone   v.   Hays  141 


Boon  v.  Hall  169 

Borough  of  Carlisle  v. 

Marshall  112 

Bowker  v.  Pierce  131fl 

Bradner  Smith  &  Co.  v. 

Williams  78 

Bragaw  v.  Sup.  Lodge  K. 

&  L.  H.  170 

Bramblet  v.  Commonwealth 

Land  &  Lumber  Co.  133 
Brandon  r.  Robinson  14 

Briggs  v.  Spaulding  135 

Broadway  Nat'l.  Bank  v. 

Adams  14,  61,  73,  85 

Brown  v.  Spohr  115 

Bullard  v.  Attorney  Gen- 
eral 125 
Burwell  v.  Cawood  115 
Burwell  v.  Mandeville's 

Excr.  4,  42,  44,  65,  146 

Bushong  v.  Taylor  101 

Butterfield  v.  Beardsley  62 

Byrne  v.  Jones  136,  139 

C 

California    Nat'l.     Bank    v. 

Kenedy  143 

Carlisle   v.    People's    Bank     158 
Carpenter  v.  Danforth  136 

Carritt  v.  Real  and  Per- 
sonal Advance  Co.  89 
Chase  v.  Ladd  123 
Cheatham  v.  Rowland  101 
Christian  v.  Worsham  169 
Citizens'  Building  Ass'n.  v. 

Coriell  131,  135 

Clagett  r.  Kilbourne      23,  62,  79 
Clark   v.   Carter  123 

Clarkson  v.   Robinson  131o 

Clopton  v.   Gholson  44 

Coal    Company    v.    Blatch- 

ford  99 

Colburn  v.   Grant  122 

Coleman   v.   Connolly  116 

Comes  v.  Clark  28 

Commonwealth   v.   People's 

Five  Cent  Sav.  Bank  111 

Connally  v.  Lyons 

48,  99,  101,   157 
Converse  v.  Hamilton  104 


XV1I1 


TABLE  OF  CASES. 


(The  references  are  to  sections.) 


Cottingham  v.   Equitable  B. 

&   L.   Ass'n.  169 

Cox  v.   Hickman       7,  GO,  71,  72 

Crawford  v.   Gross  62,   73 

Crocker    v.    Rogers  85 

Cromey   v.    Bull  126 

Crooke  v.  County  of  Kings     95 

Cross  v.  Jackson  12 

Crowell  v.  Jackson  136 

Cummings  v.   People  133 

Cunningham  v.  Pell  107 

Curry  v.  Dorr  36 

Curtis  v.   Smith  103 

Cutbush  v.  Cutbush  42 

D. 

Dartnell,  In  re.  135 

Deaderick  v.  Cantrell  121 

Dias    v.    Brunnell's    Execu- 
tor 85 
Diggs  v.  Fidelity  &  Deposit 

Co.  123,  126 

Dillard   v.    Dillard's    Execu- 
tors 117 
Dodge  v,   Tulleys  99 
Donaldson  v.   Allen                  116 
Downing   v.    Marshall  95 
Duckworth  v.  Ocean  Steam- 
ship Co.                                    117 
Dyer  v.  Riley                             122 

E. 

Edmunds,  Ex  parte  40 

Edwards  v.   Warren     Lino- 
line    &    Gasoline   Works        77 
Eliot  v.    Freeman  83,    110 

England  v.  New  York  Pub. 

Co.  158 

Erie    Railroad    v.    Pennsyl- 
vania 111 
Eufaula  Nat'l.  Bank  v.  Ma- 
nassas  115 


F. 


Falardeau  v.  Boston  Art 
Students'  Ass'n.  36 

Farmers'  etc.  Bank  v.  Was- 
son  136 

Farmers'  Loan  &  T.  Co.  v. 
Chicago  &  A.  Ry.  Co.  99,  129 

Farmers'     Nat'l.      Bank     v. 

.    Moran  17 

Farnum  v.   Patch  62 

Farrington  v.   Tennessee        111 


Fidelity    Ins.    T.    &    S.    D. 

Co.  v.   Nelson  105 
First    Nat'l.    Bank    v.    Con- 
verse 143 
Fiske  v.    Eldridge  28 
Flint  v.  Stone  Tracy  Co.  110 
Fogg  -v.  Blair  147 
Fogg  v.   Virgin  28 
Fonda   v.    Gibbs  169 
Forcheimer    v.    Stewart  70 
Forest   of    Dean   Coal   Min- 
ing Co.,  In  re.  135 
Forster  v.   Fuller 
Foster  v.  Friede  115 
Frothingham  v.    Barney  62 

G. 

Gardiner   v.    Gardiner  130 
Garland,  Ex  parte 

40,   42,    44,   48,   69,  146 

Garrard   v.    Hardey  53 
German      Land      Ass'n.      v. 

Scholler  10 

Gillett   v.    Bowen  136 

Gleason    v.    McKay  21 

Glenn    v.   Allison  49 

Glenn  v.  Soule  104 

Glenn  v.   Williams  104 

Goodsite  v.  Lane  112 

Grady  v.    Ibach    &  ^Co.  102 
Great    Western     Mining     & 

Mnfg.  Co.  v.  Harris 

Green   v.    Brooks  141 

Green   v.    Putney  126 

Green  v.   Spicer  14 

Grundy  v.   Drye  118 

Guthrie   v.    Harkness  134 

H. 

Hancox  r.   Wall  135 

Hankey   v.    Hammond  4 

Hardy   r.    Yarmouth  112 

Harrison  v.    Belden        .  85 

Harrison  v.   Owsley  123 

Hart   v:  Darter  123 
Hart    v.    Seymour 

12,  24,  62,  92,   120,  157 

Hawley  v.  James  117 

Hayes   v.    Crutcher  28 

Hayes  et  al.  v.  Mathews  28 

Heard   v.    March              117,  140 

Heath  v.   Erie   Ry.   Co.  107 

Henderson  v.   Henderson  92 

Hewitt  v.   Green  125 

Hewitt  v.  Phelps         43,  70,  157 


TABLE  OF  CASKS. 


xix 


(The  references  are  to  sections.) 


Hills  v.  Bannister  &  Fuller  28 
Hill  v.  Peoples  117 
Hoadley  v.  County  Com- 
missioners 21 
Hoagland  v.  Cooper  123 
Holdship  t1.  Patterson  14 
Hollins  v.  Brierfield  Coal 

Co.  147 
Holmes  v.   McDonald     107,   135 

Holmes   v.   Walter  Q2b 

Hope    v.    Brewer  92 

H'osch       Lumber      Co.  v. 

Weeks  116 

Howarth  z:  Angle  104 

Howarth   v.   Lombard  104 

Howe  v.  Morse     20,  62,  32,  171 

Hunt  v.  Perry  112 
Hussey  zr.  Arnold 

1,    12,    30,    47,    49,  62,    68, 

77,  99,    120 

Husted  v.   Stone  85 

Hutchinson  v.  Ayres  107 

Hyde  v.  Woods  14 

I. 

Iowa    &    Cal.     Land     Com- 
pany v.   Hoag  105 

J- 

Jacobs    r.    McClintock  US 

Jarrett   v.   Johnson  131a 

Johns  f.   Herbert  99 

Johns  v.  Johns  115 
Johnson,  In  re.  39,  43,  70 
Johnson  v.  Gaines 

Johnson    v.    Johnson  85 

Johnson  z>.  Leman  49,  78 

Jones  v.   Davis  79 

Jones  v.  Jones  117 
Jones  v.  Walker 

42,   44,    65,  70,    146 

K. 

Kerrison   r.    Stewart  101 

King   v.    Dodd  52 

King   v.   Stowell  106 

King   r.    Townshend  12,    21 

King  r.  Webb  52 

Kirkman    r.    Booth  115 

Knapp  v.   Railroad   Co.  99 

Kufferman  v.   McGehee  145 

L. 

Ladd  i'.  Pigott  131a 

Lampert  r.  Haydel  16 
Land  Credit  Co.  r.  Fermoy  135 


Lange  v.  Royal  Highlanders  170 

Latrobe  v.  Mayor  111 

Leavitt  v.  Wolcott  95 
Lebeck  v.  Fort  Wayne 

Bank  101 

Lee  v.  Horton  102 

Levy  v.  Hart  95 

Long  v.  Long  17 

Loud  v.  Winchester  141,  157 
Louisville  Trust  Co.  v. 

Warren  131a 

Low  v.  Bouverie  ,  135,  143 

M. 

Magraw  v.  Pennock  169 

Mallory  v.  Russell  9,  63,  73,  153 

March  v.  Romare  118 
Martin  v.  Niagara  Falls 

Paper    Mnfg.    Co.  133 
Mason  v.  Pomeroy 

42,    46,    65,    99,  146 

Matthews  v.  Stephenson  46,  157 

May  v.  May  85,  118 
Mayo  v.  Moritz 

5,   19,  22,   76,  84,  157 
McAllister      v.      American 

Hospital   Ass'n.  151 
McDougald's      A  d  m  r.      v. 

Carey  105 

McGraw  r.    Bayard  101 

Mcllvaine  v.  Smith  16 
Merchants'  Nat'l.  Bank  v. 

Wehrmann                   62,79,  143 

Mersman  v.  Mersmaii  123 
Mexican  &  So.  American 

Company,  Re.  53 
Michoud  r.  Girod  139,  144 
Mitchell  &  Co.  r.  Whit- 
lock  29,  33,  49 
Moeller  v.  Poland  141 
Monarque  v.  Monarque  123 
Moore  r.  Universal  Ele- 
vator Co.  133 
Morrison  r.  Manchester  111 
Morrow  r.  Morrow  102 
Muscogee  Lumber  Co.  v. 

Hyer  131 

Myers  r.  Seaberger  112 

N. 

National   Bank  v.   Case  143 

Near   v.   Donnelly  62 

New  v.  Nicoll  49 
New  York  Life  Ins.  &  T. 

Co.  v.   Livingston  92fc 


XX 


TABLE  OF  CASES. 


( The  references  are  to  sections.) 


Nichols  v.   Eaton  14 

Norton  v.  Phelps  44,  69,  70,  99 
Noyes  v.   Blakeman  49 

O. 

O'Cain  v.   O'Cain  124 

Oelrichs  v.  Spain  102 

Oliver's   Estate  62,   78 

Oliver  v.   Oliver  136,   137 

O'Neile  v.   Ternes  136 
O'Neill  v.   Sup.    Council   A. 

L.  H.  170 

Orr  v.   Yates  118,   168 

Owen   v.    Delamere  42 

Oxley  v.   Lane  95 

P. 

Pacific    Bank    v.    Windram 

15,  73 

Packard  v.   Nye  28 

Parmenter  v.,  Barstow  34 

Payne  v.   Bowdrie  171 

Pease  v.   Pease  158 

Penn  v.   Folger  162 

Pennington  v.  Metropolitan 

Museum   of  Art  115,   125 

People      v.      North      River 

Sugar   Refining  Co.  2 

People    ex  rel.    Darrow    v. 

Coleman  111,  112 

People     ex     rel.     Power     v. 

Rose  158 

People   ex   rel.    Winchester 

v.   Coleman  1,   66 

Peper  -v.  Fordyce  99 

Perin  v.  Carey  90 

Perrin  v.  Lepper  135.  141 

Philadelphia  Trust  S.  D.  & 

I.    Co.   v.   Philadelphia   & 

R.   C.   &  I.   Co.  117 

Phillips    v.    Blatchford 

21,    62,    66,    76 

Pjtkin  v.  Pitkin       4,  42,  44,  146 
Pittsburg  Library  Ass'n.  v. 

Mercantile    Library    Hall 

Co.  133 

Pittsburg    Wagon     Works' 

Estate  12,   21,   62,   78 

Pope  v.  Elliott  14 

Potter  v.   Couch  95 

Poullain   v.   Poullain  135 

Prinz  v.   Lucas  46,  78 

Purdy  v.  Lynch  122 

P.    C.    &   St.    L.    Ry    Co.   v. 

Schmidt  4 


R. 

Ratcliffe  v.   Sangston  117 

Raybould,  In  re.  35,  41,  157 

Raybould  v.   Turner  4 

Rice  v.   Barrett  95 

Rice  v.  Lane  145 

Rice  v.    Rockefeller  142 

Richardson,  Ex  parte 

42,    44,    146 

Rjchardson  v.  Van  Auken  141 
Rife  r.  Geyer  14 

Roberts  v.  Corning  92 

Roberts  v.  Hale  169 

Robinson   v.   Dover  111 

Roby  v.  Smith  99,  129 

Rochford  r.  Hackman  14 

Rogers  v.  Rogers  140,  169 

Roger  Williams  Nat'l.  Bank 
v.    Groton    Mfg.    Co. 

28,   49,   68,   78 

S. 

Sanders  v.   Houston   Guano 

Co.  101 

Seaver  v.   Fitzgerald  90 

Shaw  v.  Paine  119 

Shipman  v.  Rollins  95 

Shipp  v.  Williams  99 

Shirk  v.  LaFayette  99,  129 
Shoe  &  Leather  Nat'l.  Bank 

v.   Dix  30,   49,   68,   99 

Shropshire  U.  R.  &  C.  Co. 

v.   The   Queen  89 

Simmons  v.   Oliver  162 

Simpson  v.   Cook  95 

Skinner,  Re.  135 
Smith  v,  Anderson 

10,     22,     55,     74,      83,  120, 

153,  157 

Smith  v.  Ayer  4,  42,  44,  65,  146 

Smith  v.  Hurd  136 

Snowdon    v.    Dales  14 

Southworth  v.  Morgan   151,  168 

Spenglar  v.  Kuhn  116 
Spotswood  v.  Morris  12,  86 
State  v.  Central  Savings 

Bank  111 

State  v.  Matthews  112 
State  ex  rel.  v.  Standard 

Oil    Co.  2 

Sternfels   v.   Watson  169 

Stevenson,  In  re.  169 

Stewart  v.  Harris  137 

Stewart  v.   Smith  137 

Stinson  v.  Boston  112 


TABLE  OF  CASES. 


XXI 


(The  references  are  to  sections.) 


Stone  v.  Kellogg  134 

Stroh  v.  City  of  Detroit  112 

Strong  v.   Repide  136 

Suarez  v.   Pumpelly  116 

Sutton  v.   Aiken  17 

T. 

Tabernacle  Baptist  Church 
v.  Fifth  Ave.  Baptist 
Church  171 

Taft  v.  Brewster  28 

Taft  v.  Ward  77 

Tappan  v.  Bailey  77 

Taylor  tr.  Davis 

26,  39,   68,   75,  99,   149 
Taylor  z:   Dickinson  117 

Thatcher   v.    Dinsmore  28 

Thibert   v.    Sup.    Lodge    K. 

H.  170 

Thompson  v.  Andrews        42,  44 
Thorn  v.  De   Breteuil 

94,   126,   157 

Tillott,  Lee  v.  Wilson,  In  re.  141 
Toronto  General  Trust  Co. 

v.  Chicago,  B.  &  Q.  R.  Co.  103 
Townsend  v.  Wilson  169 

Triseoni  v.  Winship  136 

Turnbull  v.  Pomeroy  13lo 

Tyrrell  v.  Washburn  77 

U. 

Ubhoff   v.    Brandenburg         117 
United  States    v.    Standard 

Oil  Co.  of  New  Jersey  2 

United  States  Trust  Com- 
pany v.  Chauncey  92d 

V. 

Van    Allen   v.   Assessors  111 

Vanderpool  v.  Loew  90 

Van  Sandan  v.  Moore  53 

Van  Vetchen  v.  Terry  101 

Von   Au   v.   Wagenheimer  136 


W. 

Wakeman  v.   Dalley  135 

Walburn  v.  Ingilby  53 

Walker  v.  Sharpe  141 

Walker  v.   Wait  86 

Walsh  v.  Goulden  136 

Ward  v.   Davis  12,  78 

Ward  v.  Maryland  129 

Warner  v.   Beers  80 

Warner  v.   Rice  15 

Wells-Stone  Mercantile  Co. 

v.  Grover  8,  43,  60,  64.  71,  73 
Western  R.  Co.  v.  Xolan  102 
Weston  v.  Barker  85 

White  v.  White  14 

Williams  v,  Boston 

84,    86,    113,    153 

Williams  v.  Johnson  84,  86 

Williams    v.    Montgomery      92k 
William  Cameron  &  Co.  v. 

First   Nat'l.   Bank  86 

Willis  v.  Braucher  162 

Willis   v.    Greiner  12,    86 

Wilder  v.  Hast  131 

Wilson  v.  Stewart  116 

Winslow  v.  Minn.  &  P.  R. 

R.   Co.  101 

Winsor  v.   Mills  92 

Winthrop  v.  Attorney  Gen- 
eral 116 
Wioddrop  v.  Weed 

48,    146,    148,    149,    169 
Wood  v.  Dummer  147 

Wright     v.     Caney      River 

Ry.  Co.  33,  46,  64,  75,  157 
Wren  v.  Hoffman  28 

Wynne  v.  Humberston  141 

Y. 

Young  v.  Snow  89,  91 

Z. 

Zehnbar  v.   Spillman  101 

Zonne  v.   Minneapolis   Syn- 
dicate 83,  110 


CHAPTER  I. 
EXPLANATORY. 

§  1.  The  purpose  of  this  book. — This  work  is  to  consider  to 
what  extent  arrangements  may  be  made,  whereby  persons, 
natural  or  artificial,  may  transfer  legal  title  in,  and  control  and 
management  of  property  to  another  or  others  for  purposes  of 
trade,  at  the  same  time  not  creating  the  relationship  of  prin- 
cipal and  agent,  though  the  profits  or  income  are  to  belong  to 
the  transferors. 

In  other  words,  there  is  attempted  in  this  book  to  discuss  the 
attitude,  that  a  trustee  under  a  declaration  of  trust  for  the 
carrying  on  of  a  business  may  sustain  to  his  contracts  and  acts 
in  the  management  of  such  business,  the  liability  generally  and 
specially  of  the  trust  estate  itself  and  the  liability  vel  non,  out- 
side of  their  interest  in  the  trust  estate,  of  the  creators  or 
settlors  of  the  trust  for  whose  benefit  it  is  established.  Inci- 
dentally there  will  be  noticed  the  principles,  or  such  of  them  as 
seem  germane  or  illustrative,  in  trusts  for  the  continuing  of 
businesses  previously  carried  on  by  testators  and  where  settlors 
may  otherwise  have  established  trusts  embarked  in  trade,  where 
the  equitable  interests  are  in  third  persons.  It  is,  of  course,  to 
be  conceded,  as  a  general  proposition,  that,  if  one  is  the  pro- 
prietor of  a  business,  his  personal  liability  is  behind  its  acts  and 
contracts,  and  if  two  or  more  are  the  proprietors  there  is  a 
joint  and  several  liability,  no  matter  what  may  be  their  arrange- 
ments with  each  other.  Such  business  is  ordinarily  carried  on 
by  an  agent,  if  not  personally  conducted,  and  the  acts  of  the 
agent  are  those  of  the  principal,  when  within  the  scope  or  appar- 

1 


§   1.]  EXPLANATORY.  [CHAP.  I. 

ent  scope  of  the  agency.  Also,  it  is  too  well  settled  to  need 
discussion,  that,  at  law,  this  personal  liability  cannot  be  avoided, 
where  the  ultimate  owners  of  a  business  establish  it  and  provide 
for  its  being  conducted,  unless  the  title  thereto  be  vested  in  a 
corporation,  with  no  statute  specifically  affixing  liability  over 
to  the  ownership  of  paid-up  stock. 

It  is  thought  to  be  well-settled,  that  a  corporation  is  such  a 
distinct  legal  entity  apart  from  its  shareholders,  that  it  is  neces- 
sary for  any  law  authorizing  its  creation  to  declare  expressly, 
that  its  shareholders  are  liable  personally  for  its  acts  and  con- 
tracts, or  they  will  not  be  so  held.  This  principle  was  clearly  and 
adequately  expressed  by  Judge  Finch  of  the  New  York  Court 
of  Appeals,1  as  follows :  "It  is  the  essential  and  inherent  char- 
acteristic of  a  corporation  that  it  alone  is  liable  for  its  debts, 
because  it  alone  contracts  them,  except  as  that  natural  and 
necessary  consequence  is  modified  by  some  explicit  command 
of  the  statute,  which  either  imposes  an  express  liability  upon 
the  corporators  in  the  nature  of  a  penalty,  or  affirmatively  re- 
tains and  preserves  what  would  have  been  the  common-law  li- 
ability of  the  members  from  the  destruction  involved  in  the 
corporate  creation.  In  other  words,  the  individual  liability  of 
the  members,  as  it  would  have  existed  at  common-law,  is  lost 
by  their  creation  into  a  corporation,  and  exists  thereafter  only 
by  force  of  the  statute  *  *  *  so  far  preventing  by  the  interven- 
tion of  an  express  command,  the  total  destruction  of  individual 
liabilities,  which  would  flow  from  the  inherent  effect  of  the 
corporate  creation." 

All  of  this  is  to  the  effect,  that,  though  in  shareholders  exists 
the  right  to  create  directors  and  limit  their  term  of  service  and 
elect  others,  in  their  stead,  in  the  way  and  manner  and  at  the 
times  prescribed,  yet  those  directors  are  not  the  agents  of  those 
who  appoint  them,  but  of  a  distinct  person,  when  acting  within 
the  scope  of  their  agency. 

iPeople   ex   rel.  Winchester  v.   Coleman    (1892),   133   N.    Y.   279 
1.  c.  284,  31  N.  E.  96. 
2 


CHAP.  l]  PURPOSES  OF  THIS  BOOK.  [§   1. 

Thus  far,  and  especially  in  connection  with  the  further  fact, 
that  this  artificial  person  is  endowed,  if  not  with  immortality, 
at  least  with  a  certainty  of  continued  existence  in  the  full  vigor 
of  its  primal  creation,  it  might  be  thought,  if  there  is  no  such 
"explicit  command  of  the  statute,"  as  has  been  mentioned,  it 
would  be  an  academic  discussion  to  pursue  such  a  course  as 
this  volume  purposes. 

Nevertheless,  as  the  corporation  is  the  creature  of  statute, 
those  who  employ  it  as  an  agency  accept  the  burdens  along  with 
the  benefits  that  are  expected.  It  has  only  such  rights  as  its 
creator  confers  and  these  may  be  hedged  about  in  their  exercise 
by  such  regulations  as  that  creator  sees  fit  to  impose.  It  is 
sufficient  to  say,  without  elaboration,  that  these  rights  differ  in 
many  respects  from  those  which  belong  to  natural  persons,  and 
especially  in  their  being  less  absolute  and  more  relative. 

The  growing  complexity  arising  out  of  conditions,  both  in- 
trastate  and  interstate,  in  the  United  States  has  produced  and 
seems  likely  to  continue  to  produce,  a  vast  amount  of  legislation 
particularly  regarding  corporations.  The  privilege  of  corporate 
organization  apparently  has  come  to  be  considered,  either  so 
valuable  as  to  stand  the  impact  of  all  kinds  of  regulation,  or  so 
defenceless  against  statutory  purpose  as  to  make  indulgence  in 
their  regulation  the  sport  of  legislatures.  Therefore,  it  may 
not  be  the  cause  of  wonder,  that  business  and  enterprise,  de- 
manding such  aggregation  of  means,  as  is  afforded  by  the  owner- 
ship of  shares  of  stock  in  corporations,  is  seeking  other  agencies 
than  corporations  for  their  uses. 

If,  as  is  said  by  the  Supreme  Judicial  Court  of  Massachusetts2 
associates  interested  in  a  business  enterprise  may  obtain  "most 
of  the  advantages  belonging  to  corporations,  without  the  author- 
ity of  any  legislative  act,  and  with  freedom  from  the  restrictions 
and  regulations  imposed  by  law  upon  corporations,"  and,  if  this 
is  true,  there  at  least  is  presented  a  choice  between  association 
for  such  a  purpose  and  corporations. 

2Hussey  v.  Arnold   (1904),  185  Mass.  202,  70  N.  E.  87. 

3 


§    2.]  EXPLANATORY.  [CHAP.   I. 

This  volume,  it  is  hoped,  may  supply  useful  suggestion,  based 
upon  decided  cases,  for  an  intelligent  solution  of  the  problem  in 
the  choice  of  a  corporate  entity,  or  of  a  method  arising  out  of 
a  purely  contractual  relation,  for  the  conduct  of  business  by 
the  use  of  aggregated  capital  not  belonging  to  a  partnership. 

§  2.  Not  Advocated  as  a  Method  of  Escaping  Legitimate 
Responsibilities. — The  fact  that  advantages  seem  to  be  offered 
over  other  methods  of  business  organization  should  not  be 
taken,  however,  as  evidence  that  the  plan  set  forth  in  this  book 
is  not  consistent  with  the  public  interest  in  matters  of  business 
control  and  regulation.  Indeed,  it  is  thought,  that  the  trust 
relation  thus  established  is  the  ideal  toward  which  much  corpor- 
ate legislation  has  striven  and  will  continue  to  strive,  in  vain. 

That  combinations  in  business  in  a  trust  form  are  readily 
made  amenable  to  what  appears  to  be  the  public  interest  is  aptly 
attested  by  the  experience  in  the  United  States  with  the  so- 
called  "trusts"  in  restraint  of  trade.  These  at  one  time  consisted 
of  arrangements  whereby  the  title  to  stock  in  various  prior  com- 
peting corporations  were  vested  in  trustees,  who  controlled  the 
action  of  the  various  companies,  not  through  any  direct  authority, 
however,  to  operate  the  business,  but  by  their  votes  at  corporate 
meetings.3  Transferable  trustee  certificates  were  issued  to  the 
various  former  stockholders  of  the  corporations.  These  "trusts" 
were  declared  illegal,  in  the  first  of  the  cases  just  cited,  because 
the  controlled  corporations  were  made  parties  to  the  agreement, 
and  the  act  as  to  them  was  held  to  be  ultra  vires,  in  that  corpor- 
ations had  no  right  to  combine,  except  in  the  mode  prescribed 
by  statute.  In  the  other  case,  the  corporations  were  not  made 
parties  to  the  trust  instrument,  but  the  court  looked  beyond  the 
terms  of  the  instrument  and  the  fiction  of  corporate  entity  and 
followed  the  holding  in  the  New  York  case,  on  the  ground  that 
the  separate  entity  of  corporations  would  be  disregarded  in  aa 
instance  of  this  kind,  and  the  act  was  nevertheless  a  corporate 
act  and  an  ultra  vires  one,  and  that  "the  agreement  of  organi- 

SPeople  v.  North  River  Sugar  Refining  Co.  (1890),  121  N.  Y.  582; 
State  ex  rel.  v.  Standard  Oil  Co.  (1892),  49  Ohio  St.  137. 

4 


CHAP.    I.]  CHANGING   STATUTES.  [§   2a. 

zation  was  in  and  of  itself  in  restraint  of  trade  and  amounted 
to  the  creation  of  an  unlawful  monopoly."4  Combines  then 
found  a  more  secure  harbor  of  refuge  in  the  "holding"  corpor- 
ations.4 They  have  abandoned  the  trust  form,  and  the  legisla- 
tion by  the  Federal  and  State  governments  against  combination 
in  restraint  of  trade,  commonly  called  "anti-trust  laws,"  no 
longer  has  any  particular  significance  in  an  exact  use  of  the 
word.  These  "anti-trust"  laws  have  been  referred  to  as  a 
recognition  by  inference,  from  their  terms,  of  the  legality  of 
business  trusts,  wherein  "restraint  of  trade"  is  not  attempted.5 
However,  we  are  not  concerned  in  this  work  with  the  subject 
of  restraint  of  trade,  and  only  make  the  above  reference  in  this 
introduction,  as  illustrative  of  the  fact  that  the  trust  form  has 
not  been  found  to  be  particularly  suited  to  the  evasion  of  anti- 
monopoly  legislation,  and  to  bring  the  reader's  attention  to  the 
fact  that  such  legislation  in  no  way  interferes  with  the  embark- 
ing of  trust  estates  in  legitimate  businesses,  the  only  kind  of 
business  with  which  this  book  is  concerned. 

The  word  "trust"  as  is  perceived,  has  taken  on,  in  com- 
mon parlance,  an  ambiguous  meaning,  its  more  modern 
application  having  something  of  sinister  import.  This  book 
treats  the  word  in  its  older  and  better  sense  and  endeavors  to 
show  the  principles  it  stands  for  are  not  only  applicable  to  pres- 
ent business  needs,  but  will  conduce  to  placing  business  on  a 
higher  plane. 

§  2a.  Difficulties  of  Corporations  as  to  Changing  Statutes. — 
As  business  expands  into  new  states  and  countries  it  finds 
that  the  fundamental  principles  of  trade  are  alike  everywhere, 
with  the  principal  exception,  however,  that,  if  such  business  is 
clothed  in  the  corporate  form,  it  finds  that  it  is  placed  under 
diverse  and  discordant  views  as  to  what  its  rights  and  liabilities 
are.  The  corporate  status  is  created  and  regulated  by  statutes. 

4U.  S.  v.  Standard  Oil  Co.  of  New  Jersey  (1911),  221  U.  S.  1, 
1.  c.  41. 

^Francis   Lynde  Stetson  on  "The   Government  and  the  Corpor- 
ations" in  the  Atlantic  Monthly  for  July,  1912. 

5 


§    2b.]  EXPLANATORY.  [CHAP.    I. 

These  statutes  differ  in  different  localities  and  at  different  times 
in  given  localities,  owing  to  the  experiments  of  legislators  in 
attempting  to  bring  about  various  reforms.  It  is  practically 
impossible  for  a  corporation  doing  business  over  a  wide  territory 
to  have  that  assurance  of  its  rights  which  a  sound  and  stable 
business  demands.  It  must  keep  constantly  on  the  alert  to  guard 
itself  against  the  enactment  of  new  legislation,  and  must  keep 
counsel  constantly  at  work  to  ascertain  what  the  meaning  of 
new  laws  is.  It  often  happens  that,  as  soon  as  a  particular 
question  has  been  decided  by  the  courts,  the  law  construed  has 
been  repealed  and  a  new  one  put  in  its  place,  of  which  construc- 
tion must  be  had  at  the  cost  of  litigation  and  uncertainty  before 
its  effect  will  be  known.  The  resistance  of  corporations  to 
statutory  regulations  gives  rise  to  a  popular  belief  that  corpor- 
ations are  not  law  abiding  bodies,  although  the  corporation 
may  be  resting  its  resistance  upon  just  grounds.  The  corpor- 
ation must,  in  opposing  what  appears  to  be  destructive  legisla- 
tion, pay  the  price  of  an  unpopularity  which  reacts  in  further 
legislation  or  in  unfavorable  verdicts  by  juries.  In  the  true 
sense  of  the  words,  therefore,  it  cannot  be  said  that  corporations 
stand  before  the  law  with  the  same  rights  as  individuals. 

The  indefinite  and  variable  notions  entertained  according  to 
times  and  places,  and  the  temperaments  of  courts,  in  their  appli- 
cation to  corporations,  have  a  detrimental  effect  upon  not  only 
the  activities  of  business  itself,  but  upon  the  confidence  of  those 
who  supply  the  means  for  new  business,  namely,  the  investors. 

§  2b.  Distinction  as  to  Trust  Estates  in  Business. — 
It  is  thought  that  trust  estates  embarked  in  business  will  not 
be  subject  to  such  uncertainty.  They  bring  to  their  legal  sup- 
port, a  long  line  of  authority  based  upon  broad  principles 
applicable  thereto  and  irrespective  of  statutory  experiment.  The 
moral  advantages  to  all  concerned,  will,  in  our  opinion,  excuse 
them  in  the  future  from  a  great  many  statutory  restrictions 
placed  upon  corporations.  Only  such  parts  of  the  subject  as 
seemed  of  particular  interest  to  the  question  in  hand  have  been 
treated  in  this  book.  Accessory  problems  are  fully  discussed 
6 


CHAP.  I.]  PERSONAL  RESPONSIBILITY.  [§   2c. 

in  treatises  on  Equity  Jurisprudence  and  its  branches  in  a  man- 
ner highly  satisfactory  to  the  legal  profession.  It  is  hoped  this 
work  will  stimulate  return  to  a  wider  use  of  those  books  and 
the  adaptation  of  their  principles  to  modern  conditions ;  that 
they  will  be  glad  of  a  surcease  from  the  literalism  of  ill-drawn 
statutes,  unending  annotation  of  cases  and  ceaseless  inpour  of 
text-books  which  are  mere  instances  in  statutory  construction, 
like  a  tessellated  floor  on  a  foundation  of  sand. 

§  2c.  Personal  Responsibility  in  Corporate  and  Trust  Manage- 
ment.— The  impersonal  character  of  a  corporation  as  a  merely  le- 
gal entity  has  rendered  easy  the  shifting  of  all  kinds  of  respons- 
ibility. It  has  encouraged  the  erection  of  a  being  which  pur- 
chases from  a  promoter  at  an  inflated  price,  under  pretense  of 
its  being  an  independent  purchasing  power.  It  has  merged 
companies  independent  of  each  other  and  natural  rivals,  so 
as  to  control  their  activities  through  what  is  known  as  a  holding 
company,  while  all  are  held  out  to  the  world  and  their  several 
stockholders  as  acting  independently.  So  much,  indeed,  has  this 
practice  prevailed,  that  directors  are  mere  figure  heads  so  far 
as  the  policy  of  each  corporation  is  concerned,  as  they  are 
governed  by  others  who  may  not  even  possess  the  qualifications 
required  by  statute  to  become  a  director.  This  method  neces- 
sarily derrogates  from  all  theory  of  trust  and  confidence  sup- 
posed to  be  reposed  and  makes  of  charters  themselves  hollow 
shams  reflecting  a  sort  of  immorality  upon  corporate  business. 

Out  of  this  situation  has  grown  a  tendency  in  legislation  to 
deal  with  directors  and  other  officers  of  corporations  in  a  strictly 
personal  way,  both  civilly  and  criminally.  The  trust  estate  sys- 
tem hereinafter  expounded  should  relieve  business  of  much  of 
the  odium  that  corporate  abuse  has  created,  for  at  least,  it  may 
be  thought  that  the  personality  of  a  trustee  in  equity  can  hardly 
be  lost  in  the  estate  he  manages  as  that  of  a  director  has  been, 
in  the  corporation  he  represents.  As  old  as  the  trustee  idea  is 
that  tendency  has  not  yet  appeared  with  it. 

But  of  these  and  other  considerations,  it  seems  best,  that  the 

7 


§    3.]  EXPLANATORY.  [CHAP.    I. 

reader  should  be  informed,  as  they  are  unfolded  in  treatment, 
preliminary  questions  being  first  disposed  of. 

§  3.  Plan  of  Treatment. — To  secure  a  comprehensive  grasp 
of  the  precise  nature  of  the  plan  of  business  organization  here 
under  consideration,  the  reader  is  advised  to  examine  one  or 
more  of  the  "Agreements  and  Declarations  of  Trust,"  set  forth 
in  the  back  of  this  book  under  the  title  of  "Exhibits,"  before 
taking  up  the  text  proper  beginning  with  Chapter  II. 

The  arrangement  and  order  of  Chapters  is  designed  to  supply 
answers  somewhat  in  the  following  sequence  of  inquiry: 

(1)  Is  the  general  plan  a  legal  one? 

(2)  Are    the    equivalents    of    corporate  advantages, 
namely    (a)    exemption    of    shareholder  liability,   (b) 
transferable  shares,    (c)   continued  existence,  and   (d) 
limited  number  of  necessary  parties  to   litigation,   le- 
gally and  practicably  attained? 

(3)  Does  the  arrangement  stand  on  as  good  or  better 
basis  as  regards  taxation? 

(4)  May    trust    assets    in    business  be  managed  as 
well  and  practicably  as  those  of  corporations? 

If  the  reader  resolves  these  questions  affirmatively,  then  he 
will  be  prepared  to  consider,  whether  there  are  advantages, 
either  general  or  special,  or  as  suited  to  particular  enter- 
prises, possessed  by  trustee  management  over  that  by  a  corpor- 
ation. Generally  speaking,  the  following  advantages  may  be 
thought  to  exist: 

(1)  The  doing  of  business  upon  the   common   law 
right  of  contract  with  freedom  from  all  statutory  ex- 
actions that  may  be  imposed  upon  corporations  both 
foreign  and  domestic,  as  merely  artificial  persons. 

(2)  The  right  of  trustees  to  apply  to  Courts  for  di- 
rection in  the  execution  of  their  powers,  and  thus  their 
acts  be  given  legal  certainty  in  advance  of  their  com- 
mission. 

8 


CHAP.    I.]  PLAN    OF    TREATMENT.  [§     3. 

(3)  The  protection  of  cestuis  que  trust,  in  their  deal- 
ings with  trustees,  their  right  to  accountings  and  full 
information,  without  the  right,  however,    of    securing 
information  for  improper  purposes. 

(4)  The  protection  of  creditors  in  "following"  the 
"trust  fund,"  and  their  right  against  trustees  individu- 
ally in  cases  of  fraud. 

(5)  The  freedom  with  which  the  terms  of  a  trust 
instrument  may  be  framed  for  the  conduct  of  a  par- 
ticular business  and  according  to  the  lawful  preference 
of  its  equitable  owners. 

(6)  Latitude  in  amendment  of  provisions  of  man- 
agement, as  experience  may  show  is  desirable. 

(7)  The  winding  up  of  a  business  expeditiously  and 
without  resort  to  proceedings  at  law,  with  their  conse- 
quent  burden   of   delay   and  expense,   under   express 
provisions  of  the  trust  instrument,  upon  any  termina- 
ation  of  the  trust. 

Incidental  to  a  part  of  the  foregoing,  the  practical  experience 
in  Massachusetts  with  these  trusts  is  recited  and  suggestions 
afforded  for  -the  drawing  up  of  agreements  establishing  such 
trusts,  together  with  other  instruments  incident  to  their  manage- 
ment and  operation,  the  work  closing  with  exhibits  of  trust 
instruments  used  by  trust  estates  in  actual  operation. 

As  the  strict  relation  of  trustee  and  cestui  que  trust  must 
never  be  forgotten  nor  derogated  from,  it  has  been  sought  to 
stress  the  necessity  of  there  being  a  complete  devolution  of  the 
legal  title  in  the  trustee  and  his  absolute  right,  so  far  as  third 
persons  are  concerned,  to  control  the  trust  estate  for  all  purposes 
within  the  scope  of  the  trust  instrument  and  bind  it  by  his  acts 
and  contracts,  the  principles  of  equity  governing  his  respons- 
ibility to  his  cestuis  que  trust. 


CHAPTER  II. 

VARIOUS    METHODS    OF    ESTABLISHING    A    TRUST    ESTATE    IN 

BUSINESS. 

§  4.  Trust  Estate  Embarked  In  Business  Created  By  Wills. — 
It  has  often  occurred,  both  in  England  and  in  the  United  States, 
that  a  testator  has  wished  to  provide  for  the  continuance  of  a 
partnership  business  after  his  death.  Thus  in  Ex  Parte  Rich- 
ardson,1 where  a  partnership  of  which  testator  was  a  member 
was  carried  on  after  his  death,  the  question  before  the 
court  for  decision  was  whether  or  not,  upon  the  partnership  be- 
coming insolvent,  his  general  estate  was  liable  to  its  creditors. 
It  was  said  by  Sir  John  Leach,  V.  C,  that:  "A  trustee  under  a 
will,  carrying  on  a  trade,  pledges  the  trust  property  given  to 
him  for  that  purpose  and  also  his  own  property;  but  what  is 
the  trust  property  given  to  him  for  that  purpose  must  depend 
on  the  terms  of  the  will."  In  this  case,  other  money  of  the 
estate  was  used  in  the  business  and  this  was  allowed  to  be 
proved  as  a  debt  against  the  partnership  in  bankruptcy,  and 
this  allowance  was  sustained.  Similar  instances  of  the  creation 
of  such  trusts  are  found  in  other  English  cases.2  Of  Ameri- 
can cases  there  appears  a  decision  by  the  Federal  Supreme 
Court,3  in  which  the  opinion  was  by  Mr.  Justice  Story.  This 
opinion  recites  that  the  will,  after  giving  sundry  legacies,  pro- 
vided by  a  codicil  for  the  testator's  interest  in  a  partnership 
continuing  until  the  expiration  of  the  term  limited  by  the  part- 
nership articles,  with  the  surviving  partner  to  conduct  the 

1(1818),  3   Maddock's  Ch.  79. 

2Hankey  v.  Hammond,  1  Cooke's  Bankruptcy  Law  67;  Ex  parte 
Garland  (1803),  10  Vesey  110;  Raybould  v.  Turner  (1899),  82  L.  T. 
(N.  S.)  46. 

3Burwell  v.  Mandeville's  Executor  (1844),  43  U.  S.  (2  How.)  560. 
10 


CHAP.   II.]  TRUSTS   UNDER  DEEDS.  [§    5. 

business  and  the  profits  and  losses  to  be  distributed  as  the  ar- 
ticles declare.  This  partner  was  not  the  executor.  The  part- 
nership becoming  insolvent,  it  was  sought  to  make  the  general 
estate  of  testator  liable  for  its  debts.  The  language  of  the 
Justice  in  denying  this  claim  is  interesting  as  showing,  at  least 
as  to  a  trust  embarked  in  trade  by  testamentary  provisions,  how 
strict  is  the  rule  as  to  the  trust  fund  or  property  being  com- 
pletely segregated  from  the  rest  of  the  estate.  He  said:  "Noth- 
ing but  the  most  clear  and  unambiguous  language,  demonstrat- 
ing in  the  most  positive  manner,  that  the  testator  intends  to 
make  his  general  assets  liable  for  all  debts  contracted  in  the 
continued  trade  after  his  death,  and  not  merely  limit  it  to  the 
funds  embarked  in  that  trade,  would  justify  a  court  in  arriv- 
ing at  such  a  conclusion  from  the  manifest  inconvenience  there- 
of, and  the  utter  impossibility  of  paying  off  legacies  or  dis- 
tributing the  residue,  without  in  effect  saying  that  the  pay- 
ments may  all  be  recalled,  if  the  trade  should  become  unsuccess- 
ful or  ruinous."  And  yet  it  could  well  be  argued,  that,  as  the 
partnership  was  to  be  continued,  as  by  the  articles  thereof  pro- 
vided, with  the  same  division  of  profits  and  losses  as  before, 
it  was  intended  each  partner  should  stand  as  before,  that  is  to 
say,  jointly  and  severally  liable  for  its  debts.  Instead,  how- 
ever, this  interest  was  decreed  to  stand  as  a  completely  segre- 
gated interest  from  the  remaining  estate,  with  the  surviving 
partner  the  trustee  thereof. 

This  ruling  was  later  approved  by  the  same  court.4 

§  5.  Trust  Estate  Created  By  A  Single  Settlor  With  Him- 
self And  Others  As  Cestuis  Que  Trust. — In  an  Ohio  case  the 
owner  of  a  business  set  it  apart  as  a  trust  estate  by  means  of  a 
declaration  of  trust,  he  to  share  in  the  income  and  profits  to 
arise  out  of  the  continued  conduct  of  the  business,  with  the  trust 
to  continue  or  not  after  his  death  upon  the  happening  or  not 

*Smith  v.  Ayer  (1879),  101  U.  S.  320.  See  also  Pitkin  v.  Pit- 
kin  (1829),  7  Conn.  307,  18  Am.  Dec.  Ill;  P.  C.  &  St.  L.  Ry.  Co.  v. 
Schmidt  (1894),  8  Ohio,  C.  C.  355. 

11 


§   6.]  TRUSTS  FOR  CREDITORS.  [CHAP.  II. 

of  a  certain  contingency.5  Its  existence  as  a  trust  estate  was 
recognized.  But  there  was  a  question  as  to  personal  liability 
for  its  debts,  because  of  its  management  as  a  business  after  the 
time,  when,  by  the  provisions  of  the  declaration  of  trust,  the 
trust  was  to  cease.  For  this  wrongful  act,  induced  by  the  con- 
sent of  the  former  cestuis  que  trust,  they  were  held  personally 
liable  for  its  debts.  In  a  Massachusetts  case  there  is  found  an 
instance  of  a  single  settlor  conveying  to  certain  trustees  an 
invention  with  full  and  exclusive  rights  of  application  for 
patents  in  this  and  foreign  countries.  The  trustees  were  to 
hold,  manage  and  control  said  patents  and  dispose  of  the  same  or 
any  interest  therein.  The  settlor's  interest  was  represented 
by  scrip  for  one  half  and  money  for  the  carrying  on  of  the  busi- 
ness was  raised  by  payments  by  scripholders  as  to  the  re- 
maining half  interest.  The  question  was  as  to  the  liability  of 
the  scrip  owners  as  partners  and  it  was  held  that  they  were 
riot  liable  for  the  debts  created  by  the  trustees,  thus  plainly 
recognizing  the  validity  of  this  trust  arrangement.6 

§  6.  Trust  Estate  Created  By  Debtor  With  Himself  And 
Creditors  As  Beneficiaries. — Instances  are  frequent  where  by  ar- 
rangement between  a  debtor  and  his  creditors  a  business  in 
embarrassment  may  be  continued  by  deed  of  trust  vesting  the 
legal  title  in  a  trustee,  with  the  creditors  primary  beneficiaries, 
and  the  trust  to  cease  upon  their  indebtedness  being  satisfied. 
One  of  the  most  notable  English  cases  of  this  character  is  In 
re  Stanton  Iron  Company,7  wherein  a  partnership  conveyed  to 
trustees  its  business  to  be  conducted  under  a  new  name  for  the 
benefit  of  creditors  joining  in  the  deed  of  trust,  the  overplus 
to  be  reconveyed  to  the  partners.  Sir  John  Romilly,  M.  R., 
said :  "The  question  is  really  whether  the  deed  constituted  a  part- 
nership thereto,  so  as  to  bring  it  within  the  provisions  of  the 
Winding  up  Acts.  I  have  two  things  to  consider — the  relation 
in  which  the  parties  to  the  deed  stand  to  each  other,  and  their 
relation  to  third  parties.  There  can  be  no  doubt  that  persons 

5Adams  v.  Nelson  (1893),  1  Ohio  Dec.  216. 
«Mayo  v.  Moritz  (1890),  151  Mass.  481,  24  N.  E.  1083. 
7(1855),  21  Beav.  164. 
12 


CHAP.   II.]  TRUSTS    FOR   CREDITORS.  [§    7. 

may  be  partners  towards  the  world,  and  yet  not  be  partners  as 
between  themselves.  But  on  the  other  hand,  persons  who  are 
partners  between  themselves  are  necessarily  partners  as  respects 
the  public."  Then  construing  the  provisions  of  the  deed  he 
concluded  it  neither  made  the  creditors  partners  between  each 
other  nor  did  it  hold  them  out  to  the  world  as  partners.  He 
then  observed:  "I  see  no  ground  for  supposing  that  they  could 
under  any  circumstances  be  held  personally  liable  to  the  creditors 
in  respect  to  the  management  of  the  business."  The  arrange- 
ment, therefore,  was  deemed  one  to  which  legislation  respecting 
partnerships  had  no  application. 

§  7.  Trust  Estate  Created  by  Debtor  With  Himself  And 
Creditors  as  Beneficiaries — Continued. — The  case  of  Cox  v. 
Hickman,8  decided  five  years  after  the  Stanton  Iron  Company 
case,  was  a  deed  of  trust  by  traders  with  like  provisions.  This 
case  was  an  appeal  from  a  decision  by  Justice  Blackburn9  who 
took  the  view  that  the  creditors  stipulated  for  such  control  over 
the  business  as  made  them  partners  as  to  debts  created  by  its 
conduct,  Justice  Crampton  concurring  on  the  ground  that  the 
trustees  were  really  managers  or  agents  and  not  trustees,  though 
so  denominated.  This  view  was  overruled  upon  great  con- 
sideration by  eleven  out  of  nineteen  judges,  the  Law  Lords  all 
being  with  the  majority.  It  was  held  that  by  the  deed  there 
was  committed,  along  with  the  conveyance  of  the  legal  title,  such 
management  and  control  in  the  trustees  as  made  the  creditors 
not  proprietors  but  merely  cestuis  que  trust  thereunder,  with  no 
personal  responsibility  for  the  debts  created  by  the  trustees. 

§  8.  Trust  Estate  Created  by  Debtor  With  Himself  and 
Creditors  as  Beneficiaries — Continued. — This  ruling  was  much 
relied  on  in  a  like  case  decided  by  the  Supreme  Court  of  North 
Dakota,10  the  court  holding  that  by  the  terms  of  the  deed  of 
trust  the  entire  management  and  control  of  the  business  con- 

8(1860),  9    C.   B.    (N.  S.)   47. 
9S.  C.  (1860),  8  H.  L.  C.  268. 

10(1898),   Wells-Stone    Mercantile   Co.   v.    Grover,    7   N.   D.   460; 
75  N.  W.  914. 

13 


§   9.]  TRUSTS   FOR  SETTLORS.  [CHAP.   II. 

veyed  was  devolved  upon  the  trustee.  This  case  was  an  action 
seeking  to  hold  the  creditors,  who  joined  in  the  deed  of  trust 
executed  by  their  debtor,  liable,  jointly  and  severally,  as  part- 
ners, and  asking  also  for  a  personal  judgment  against  the 
debtor,  upon  indebtedness  created  by  the  trustee  subsequent  to 
the  deed.  It  was  held  that  neither  the  creditors  nor  their 
debtor  was  liable  beyond  the  trust  fund.  The  court  said:  "If 
the  trust  is  valid — and  that  point  does  not  seem  to  be  contro- 
verted— then  the  trustee  became  personally  liable  on  every  con- 
tract made- by  him  in  the  discharge  of  the  trust.  *  *  *  *  He  is 
not  in  the  position  of  a  mere  agent."  This,  however,  was  not  re- 
garded as  the  conclusive  test,  but  it  was  thought  that  this  and 
the  fact  of  absolute  control  over  the  trust  property  passing  to 
the  trustee  created  an  estate,  as  to  which  all  antecedent  relations 
became  immaterial.  This  and  other  cases  hereinbefore  cited 
will  be  again  referred  to  in  questions  considered  later  on. 

§  9.  Several  Persons  Originating  Trust  Estate  For  Their 
Proportionate  Benefit. — This  may  be  accomplished  through  ar- 
ticles of  association  in  a  joint  stock  company  with  transferable 
shares  or  by  simply  contributing  money  or  property  to  this  end 
without  the  issuance  of  such  shares.  These  methods  will  be 
shown,  in  inverse  order,  by  reference  to  adjudicated  cases. 
Thus  in  Mallory  v.  Russell11  there  was  a  trust  deed  agreement 
executed  by  two  persons  associated  for  the  purpose  of  buying 
and  selling  land.  The  legal  title  of  all  land  to  be  purchased 
was  to  vest  in  a  trustee,  who  was  to  have  sole  management  and 
control  of  the  business  thus  created.  The  parties  to  the  agree- 
ment were  to  contribute  money  and  acquire  a  beneficial  interest 
in  proportion  to  the  amounts  respectively  contributed.  The 
court  said:  "The  contract  itself  rebuts  the  idea  that  persons 
who  paid  their  money  in  aid  of  the  enterprise  became  seised  of 
any  interest  in  the  land."  Therefore,  it  was  held  that  the 
widow  of  one  of  them  had  no  dower  right  in  any  of  the  land 
of  which  the  trustee  held  the  legal  title.  Cases  like  this  one 
are  rare,  however,  because  quite  generally  enterprises  of  this 
character  have  behind  them  a  large  number  of  people  and  it 
11(1887),  71  Iowa  63,  32  N.  W.  102,  60  Am.  Rep.  776. 

14 


CHAP.  II.]  TRUSTS  FOR  SETTLORS.  [§  10. 

is  more  convenient,  as  well  as  making  their  several  interests  more 
marketable  to  follow  the  plan  used  by  corporations  of  issuing 
to  contributors  certificates  or  shares. 

§  10.  Trust  Estate — In  Pursuance  to  Articles  of  Association 
for  Unincorporated  Company. — Vesting  title  in  a  trustee  or 
trustees  for  the  carrying  on  of  a  business  whose  profits  are  to 
be  divided  among  shareholders  in  a  joint  stock  company, 
whether  in  a  state  or  country  where  there  are  statutory  provi- 
sions regarding  such  a  company  or  not,  appears  in  many  cases 
decided  by  courts  of  last  resort.  Never,  however,  does  it  ap- 
pear to  have  been  held,  except  in  an  isolated  case,12  that  a 
trust  deed  was  void  where  the  title  was  in  trust  for  an  unincor- 
porated association  "and  for  the  several  use  and  benefit  of  the 
several  members  thereof  according  to  their  respective  interests, 
as  the  same  thereafter  may  be  determined  by  division  or  other- 
wise." It  was  said:  "The  association  had  no  legal  existence 
and  the  trust  deed  gives  no  intimation  as  to  who  were  the  per- 
sons associated  under  that  name".  This  case,  however,  seems 
to  confirm,  by  its  very  exception,  claim  for  the  legality  of  estab- 
lishing a  trust  as  to  any  number  of  persons  in  their  own  in- 
terest, if  the  proper  indicia  for  identification  of  beneficiaries  ap- 
pear. Merely  as  illustrative  we  give,  in  this  chapter,  a  limited 
number  of  the  many  cases,  hereinafter  to  be  referred  to,  of 
active  business  trusts  operated  in  the  interest  of  shareholders 
in  unincorporated  associjations.  In  England  a  very  notable 
case13  appears.  In  stating  its  effect  it  should  be  said  that  the 
contention  revolved  around  the  question  whether  or  not  an  as- 
sociation, whose  members  being  more  than  twenty  persons, 
were,  as  shareholders,  cestuis  que  trust  in  a  business,  estab- 
lished by  means  of  a  deed  of  settlement,  came  under  the  English 
Companies  Act  of  1862  requiring  it  to  be  registered  upon  pain 
of  being  an  illegal  partnership.  The  Master  of  Rolls,  in  the 
lower  court,  said:  "It  does  appear  to  me  that  this  is  as  plain 
a  company  or  association  formed  for  the  transaction  of  business 
for  the  purpose  of  gain  as  could  be  put  fairly  into  words,  if 

l2German  Land  Assn.  v.  Scholler   (1865),  10  Minn.  331. 
iSSmith  v.  Anderson  (1880).  15  Ch.  D.  247. 

15 


§  11.]  TRUSTS  FOR  SETTLORS.  [CHAP.  II. 

you  change  names  and  nothing  more.  If  you  call  the  certificate 
holders  'shareholders'  and  call  the  trustees  'directors'  and  call 
the  association  a  'company',  changing  those  three  names,  you 
have  about  as  simple  a  description  of  an  ordinary  company 
under  the  Act  as,  I  think,  you  can  well  have."  Thereupon  he 
condemned  the  arrangement  as  a  "mere  device  and  a  very 
transparent  one  to  endeavor  to  escape  from  the  plain  meaning 
of  the  enactment." 

§  11.  Smith  v.  Anderson  Continued, — Ruling  On  Appeal. — 
Three  Lords  Justice  reversed  this  holding  upon  the  ground, 
that  there  was  no  carrying  on,  nor  intent  to  carry  on,  any  busi- 
ness by  the  associates.  The  only  business  that  was  to  be  car- 
ried on  was  by  the  trustees,  one  of  the  Lords  saying:  "Here 
it  seems  clear  that  according  to  the  true  construction  of  the 
deed,  they  (the  trustees)  were  not  directors  or  agents,  but 
trustees.  If  that  be  so,  the  certificate  holders,  even  if  they  were 
associated  at  all,  were  not  associated  for  carrying  on  the  busi- 
ness. It  was  not  their  business.  They  could  not  have  been 
made  liable  for  any  contract  made  by  the  trustees."  Other 
English  cases  will  be  cited  and  discussed  hereinafter. 

§  12.  Trust  Estate — In  Pursuance  to  Articles  of  Association 
for  Unincorporated  Company — Continued. — American  Cases. — In 
Massachusetts  this  method  in  the  creation  of  a  trust  estate  for 
the  conduct  and  control  of  a  business  has  been  frequently  resorted 
to.  In  one  of  these  cases14  the  equitable  character  of  an  estate 
vested  in  a  trustee  for  the  purpose  of  carrying  on  a  business, 
which  had  become  insolvent,  was  distinctly  declared  to  the  ex- 
tent, that  it  could  not,  under  Massachuestts  practice,  be  pro- 
ceeded against  in  an  action  at  law.  In  another  case,15  C.  J.  Put- 
nam speaks  of  "sundry  members  of  what  is  commonly  known 
as  'a  voluntary  joint-stock  association'  organized  in  Massachu- 
setts under  a  so-called  'trust  deed'."  It  was  held  that,  under 
the  pleadings,  its  fund  only  was  liable  upon  a  promissory  note 

l^Hussey  v.  Arnold  (1904),  185   Mass.  202,  70  N.  E.  87. 
iSBank  of  Topeka  v.  Eaton   (1901),  100  Fed.  8,  affirmed  in  107 
Fed.  1003  47  C.  C.  A.  140. 
16 


CHAP.  II.]  SUMMARY.  [§  13. 

upon  the  face  of  which  there  was  a  restriction  of  personal  lia- 
bility on  the  part  of  the  trustee.  These  and  other  Massachusetts 
cases  will  be  hereinafter  cited  and  discussed.  In  North  Da- 
kota,16 in  New  York,17  in  Illinois,18  in  Texas,19  and  in  Penn- 
sylvania,20 decisions  treat  of  trust  deeds  vesting  property  in 
trustees  to  carry  on  business  for  the  benefit  of  certificate  holders 
in  unincorporated  associations. 

§  13.  Summary. — Thus  it  appears  that  it  is  by  no  means  novel 
or  unusual  that  trust  estates  should  be  created  either  for  em- 
barking in  a  new  business  or  continuing  an  old  one,  and  the  legal 
and  equitable  status  of  such  estates  ought  to  be  well  defined,  as 
also  the  relations  they  and  their  trustees  and  their  cestuis  que 
trust  bear  to  each  other  and  to  third  persons  with  respect  to- 
their  acts  and  contracts  arising  in  the  course  of  the  existence 
of  such  estates. 

16Spotswood  v.  Morris  (1906),  12  Idaho  360,  85  Pac.  1094,  6  L. 
R.  A.  (N.  S.)  665. 

!7Ward  v.  Davis  (1850),  3  Sandf.  502;  King  v.  Townshend  (1894), 
141  N.  Y.  358,  36  N.  E.  513;  Cross  v.  Jackson  (1843),  5  Hill  478. 

ISHart  v.  Seymour  (1893),  147  111.  598,  35  N.  E.  246. 

19Willis  v.   Greiner  (1894),  Tex.  Civ.  App.  26  S.  W.  858. 

sopittsburg  Wagon  Works'  Estate  (1903),  204  Pa.  St.  432,  54 
Atl.  316. 


17 


CHAPTER  III. 
THE  NATURE  OF  A  TRUST  ESTATE. 

§  14.  Status  of  Trust  Estate  Exemplified  by  Decisions. — It 
is  unimportant  in  this  treatise  to  go  into  refinements  marking 
evolution  of  the  trust  doctrine  in  England,  which  happily  for 
this  country  there  ended  in  putting  it  upon  a  stable  founda- 
tion prior  to  our  separation  from  the  mother  country.  It  suf- 
fices for  our  purpose  to  indicate  by  a  few  adjudicated  cases 
the  firm  distinction  between  a  trust  and  a  legal  estate.  In 
a  well  considered  case  in  Massachusetts1  there  was  a  question 
as  to  a  devise  to  executors  of  a  fund  in  trust  to  invest  as  they 
deemed  prudent  and  pay  the  net  income  semi-annually  to  a 
cestui  que  trust  during  his  natural  life,  with  such  income  "free 
from  interference  or  control  of  his  creditors",  with  "the  use 
of  said  income  *  *  not  to  be  anticipated  by  assignment".  The 
opinion  cited  English  authority  which  held  that  the  income 
could  not  be  made  inalienable.2  It  was  said  in  the  Adams  case, 
as  representing  the  English  view  that:  "By  the  creation  of  a 
trust  like  the  one  before  us,  the  trust  property  passes  to  the 
trustee  with  all  its  incidents  and  attributes  unimpaired.  He 
takes  the  whole  legal  title  to  the  property,  with  the  power  of 
alienation;  the  cestui  que  trust  takes  the  whole  legal  title  to  the 
accrued  income  at  the  moment  it  is  paid  over  to  him.  Neither 
the  principal  nor  income  is  at  any  time  inalienable."  But  the 
Massachusetts  court  said  that  many  American  courts  have  re- 
jected the  English  view,  and  hold  instead  that  "the  founder  of 
a  trust  may  secure  the  benefit  of  it  to  the  object  of  his  bounty, 

iBroadway  National   Bank  v.   Adams    (1882),   133   Mass.   170,  43 
Am.  Rep.  504. 

2Brandon   v.    Robinson,    18   Ves.   429;    Green   v.    Spicer,    1    Russ 
&  Myl.  395;  Rochford  v.  Hackman,  9  Hare  475;  Snowdon  v.  Dales, 
6  Sim.  524. 
18 


CHAP.   III.]  TRUST   FOR  SETTLOR^   BENEFIT.  [§    15. 

by  providing  that  the  income  shall  not  be  alienable  by  anticipa- 
tion, nor  be  subject  to  be  taken  for  his  debts,"  citing  cases  in 
the  note.3 

§  15.  Rule  Where  Settlor  Creates  Trust  For  His  Own  Bene- 
fit.— In  a  case  decided  by  the  Massachusetts  court  on  the  same 
day  of  the  decision  in  Broadway  National  Bank  v.  Adams, 
supra,  the  question  was  whether  a  married  woman,  possessed  in 
her  own  right  of  personal  property,  which  she  conveyed  to 
trustees  to  pay  the  net  income  to  her  semi-annually  during  her 
life  "upon  her  sole  and  separate  order  or  receipt,  the  same  not 
to  be  by  way  of  anticipation",  with  remainder  to  her  children, 
could  pledge  her  income  in  advance  of  its  accruing.4  The  con- 
troversy revolved  around  the  validity  of  the  clause  in  quotation 
marks,  recognized  by  the  court  as  the  equivalent  of  that  found 
in  the  Adams  case.  The  court  said:  "The  general  policy  of 
our  law  is,  that  creditors  shall  have  the  right  to  resort  to  all 
the  property  of  the  debtor  except  so  far  as  the  statutes  exempt 
it  from  liability  for  debts.  But  this  policy  does  not  subject  to 
the  debts  of  the  debtor  the  property  of  another,  and  is  not  de- 
feated when  the  founder  of  a  trust  is  a  person  other  than  the 
debtor.  In  such  case,  the  founder,  having  the  entire  jus  dis- 
ponendi  in  disposing  of  his  own  property,  may,  if  he  sees  fit, 
give  to  his  beneficiary  a  qualified  and  limited,  instead  of  an  abso- 
lute, interest  in  the  income.  *  *  *  But  when  a  man  settles  his 
property  upon  a  trust  in  his  own  favor,  with  a  clause  restrain- 
ing his  power  of  alienating  the  income,  he  undertakes  to  put 
his  own  property  out  of  the  reach  of  creditors,  while  he  retains 
the  beneficial  use  of  it.  *  *  *  It  is  true  that  a  man,  who  is  not 
indebted,  may  by  a  voluntary  conveyance  made  in  good  faith 
transfer  his  property  so  as  to  put  it  out  of  the  reach  of  his 
creditors.  When  a  man  transfers  a  trust  fund,  of  which  the 

SHoldship  v.  Patterson,  7  Watts  547;  Shankland's  Appeal,  47 
Pa.  113;  Rife  v.  Geyer,  59  Pa.  393;  White  v.  White,  30  Vt.  338;  Pope 
v.  Elliott  8  B.  Mon.  56;  Nichols  v.  Eaton,  91  U.  S.  716;  Hyde  v. 
Woods,  94  U.  S.  523. 

^Pacific  Bank  v.  Windram  (1882),  133  Mass.  175. 

19 


§    16.]  NATURE    OF   TRUST    ESTATE.  [CHAP.    III. 

income  is  to  be  paid  to  him  during  his  life,  and  the  principal  at 
his  death  to  be  paid  or  transferred  to  others,  the  principal  may 
be  beyond  the  reach  of  his  creditors;  but  we  are  of  the  opinion 
that  his  right  to  the  income  which  he  retains  himself  may  be 
alienated  by  him,  is  liable  for  his  debts  and  may  be  reached  in 
Equity." 

In  a  Maryland  case,5  there  is  the  same  reasoning  and  dis- 
tinction found  in  the  two  Massachusetts  cases  above  referred 
to,  with  the  incident  of  the  income  being  declared  for  the  main- 
tenance and  support  of  the  "immediate  family"  of  the  grantor. 
It  was  said:  "There  is  no  such  separate,  independent  and  de- 
fined interest  in  the  family,  as  to  enable  its  members,  whoever 
they  may  be,  to  enforce  the  trust  in  their  favor,"  which  ruling 
aids  in  realizing  the  vigor  existing  in  a  competent  method  for 
the  creation  of  a  trust  where  beneficiary  and  interest  are  well 
defined. 

§  16.  Rule  Where  Settlor  Creates  Trust  For  His  Otvn  Bene- 
fit— Continued. — In  Missouri  cases  by  comparison  one  with  the 
other  and  the  later  expressly  approving  the  former  cases,  it  is 
shown  that  restrictions  may  be  placed  by  the  founder  of  a  trust 
in  favor  of  another  upon  alienation  of  income,  while  if  he 
creates  a  trust  in  favor  of  himself,  the  restriction  is  nugatory.6 

In  the  older  of  these  cases  an  alleged  interest  in  the  title  to 
certain  realty  of  the  beneficiary  in  the  income  for  life  of  a 
trust  estate  was  levied  on  and  sold  under  execution  against  him. 
It  was  conceded  that  the  deed  creating  the  trust  was  by  the 
nominal  purchaser  from  this  beneficiary  and  that  he  was  in 
effect  the  founder  of  the  trust.  It  was  provided  therein,  that 
the  income  was  to  be  paid  to  him  quarterly  for  life,  and  should 
he  attempt  to  anticipate  its  accrual  in  any  way,  this  should 
operate,  to  that  extent,  in  making  it  a  fund  to  be  kept  by  the 

SWarner  v.  Rice  (1886),  66  Md.  436. 

SMcIlvaine  v.  Smith   (1867)   42  Mo.  45,  97  Am.  Dec.  295;   Lam- 
pert  v.   Haydel    (1888),  96   Mo.  439,  9  S.  W.  780,  2  L.   R.   A.   113,  9 
Am.  St.  Rep.  358. 
20 


CHAP.    III.]  DRY   AND    ACTIVE   TRUSTS.  [§    IT. 

trustee  for  the  benefit  of  the  remaindermen.  A  petition  in  equity 
was  brought  by  the  purchaser  at  execution  sale  to  have  the 
trustee  pay  to  the  plaintiff  the  income  during  the  life  of  the 
beneficiary.  In  this  case  it  was  declared  that  a  judgment 
creditor  of  the  beneficiary  could,  by  bill  in  equity,  have  the  rents 
and  profits,  notwithstanding  the  restrictions  upon  alienation 
created  by  a  donor  himself  a  beneficiary,  applied  in  satisfaction 
of  his  debt.  But  when  it  was  attempted  to  sell  the  interest  as 
a  life  estate,  upon  execution  sale,  nothing  passed.  Speaking  of 
the  purchaser  at  such  sale  the  court  asked:  "What  interest  did 
he  take  ?  By  the  terms  of  the  deed,  during  his  life  the  trustee  is 
to  control  and  manage  the  property,  to  make  loans  and  receive 
the  rents  and  profits,  to  pay  all  the  taxes,  charges,  insurance 
and  other  expenses  and  to  pay  over  to  (founder)  at  the  end 
of  each  quarter,  during  his  life,  'the  net  product  of  said  prop- 
erty', under  the  restrictions  mentioned,  with  remainder  over  and 
a  power  of  appointment  as  therein  expressed.  This  gave  him 
a  vested  life  estate  in  the  net  product  of  which  the  trustee  could 
not  deprive  him  by  the  exercise  of  any  discretion."  By  this 
case  it  is  seen,  that,  though  the  donor  had  reserved  to  himself 
the  exact  equivalent  of  a  life  estate,  yet  it  was  not  an  interest 
in  the  land  at  all,  but  merely  a  vested  interest  in  its  income, 
only  to  be  reached  by  a  proceeding  in  equity. 

§  17.  Dry  or  Passive  Trust  Distinguished  From  Active 
Trust. — The  cases  which  we  have  referred  to  all  relate  to  trusts 
in  which  their  nature  is  prescribed  by  the  creating  instrument 
and  along  with  the  vesting  of  the  legal  title  in  the  trustee  is 
given  possession  of  the  property,  which  the  trust  embraces.  In 
other  words,  the  trust  fund  or  estate  is  under  his  control  ac- 
cording to  prescribed  limitations.  A  simple  or  dry  trust  has 
been  said  to  exist  "When  property  is  vested  in  one  person  in 
trust  for  another,  and  the  nature  of  the  trust,  not  being  pre- 
scribed by  the  donor,  is  left  to  the  construction  of  law".7 

In  some  jurisdictions  these  trusts  are  not  recognized,  but  such 

TPerry  on  Trusts,  6th  Ed.  sec.  520. 

21 


§    18.]  DRY   AND   ACTIVE   TRUSTS.  [CHAP.    III. 

an  estate  vests  directly  in  the  beneficiaries.8  But  whether  so 
or  not,  the  trustee  holds  neither  possession  nor  control  of  the 
property,  and  the  cestui  que  trust  controls  the  use  and  has  the 
right  to  direct  the  trustee  to  execute  whatsoever  conveyance 
to  another  he  sees  fit.9  Nevertheless,  it  required  a  statute  to 
prevent  even  a  dry  trust  from  having  a  very  positive  effect  on 
property  under  statutes  of  distribution.  Thus  it  is  said  by  the 
author  last  cited  that:  "According  to  the  law  previously  to  the 
Statute  3  and  4  Will.  IV  Ch.  105,  no  dower  attached  upon  a  mere 
equitable  estate  of  inheritance."10 

Now,  however,  the  trustee,  where  there  is  a  simple  or  dry 
trust,  has  merely  a  three-fold  ministerial  duty:  (1)  To  permit 
the  cestui  que  trust  to  occupy  and  receive  the  income  and  profits 
of  the  estate;  (2)  To  execute  such  conveyances  or  make  such 
disposition  of  the  estate  as  the  cestui  que  trust  may  direct  and 
(3)  To  protect  and  defend  the  title  or  allow  his  name  to  be 
used  for  such  purpose.11  Nevertheless,  it  is  seen  that  even  a 
simple  or  dry  trust  has  some,  though  a  minor,  influence  in  dis- 
tinguishing an  equitable  estate  from  that  where  the  real  owner 
possesses  the  legal  title  both  in  form  and  in  fact. 

§  18.  Summary. — The  authorities  above  cited,  which  are 
merely  illustrative  and  capable  of  multiplication  indefinitely, 
show,  that  even  a  dry  but  especially  an  active  trust  is  a  distinct 
lawful  entity,  as  much  so  as  a  legal  estate,  and  where  the  instru- 
ment of  creation  empowers  the  trustee  to  manage  and  control  it, 
that  he  is  free  from  any  sort  of  restraint  upon  the  part  of 
cestuis  que  trust,  when  acting  within  the  limits  of  his  authority. 
We  have  seen  also  that  the  rule  is  the  same  as  to  this  freedom, 
whether  the  founder  of  the  trust  creates  the  estate  solely  for  the 
benefit  of  another  or  for  his  own  benefit  for  life  with  remainder 

8 Ala.  Code  1907,  sec.  3408;  Sutton  v.  Aiken  (1879),  62  Ga.  733; 
Long  v.  Long  (1883),  62  Md.  33;  Farmers'  Nat'l.  Bank  v.  Moran 
(1883),  30  Minn.  165. 

9Hill  on  Trustees,  pp.  316,  317. 

I0(ibid  page  316.) 

UPerry  on  Trusts  (6th  Ed.)  Sec.  520;  Hill  on  Trustees,  p.  317. 
22 


CHAP.  III.]  SUMMARY.  [§  18. 

over  after  his  death.  Whether  a  founder  may  create  a  trust 
estate  with  provision  merely  for  income  for  his  benefit  without 
providing  for  the  ultimate  disposal  of  the  principal,  that  is  to 
say,  so  as  to  make  his  interest  to  consist  solely  in  income,  is 
to  be  considered  hereinafter.  At  all  events,  however,  so  far 
we  have  ascertained  that  a  founder  may  create  a  trust  for  his 
own  benefit,  so  that  his  right  to  exercise  control  thereof  shall 
cease.  In  other  words,  he  can  found  an  estate,  out  of  which 
he  reserves  the  income  to  himself  for  a  fixed  time,  and  make 
the  principal  inalienable  by  himself,  and  not  subject  to  his  debts 
and  contracts  subsequently  created. 

Elaborate  treatises  on  trusts  and  trust  estates  all  presuppose, 
if  they  may  not  specially  consider,  this  result,  as  otherwise 
they  would  be  merely  academic.  This  result,  however,  is  all 
of  which  there  is  need  for  the  subject  in  hand.  To  attempt  any- 
thing more  would  be  merely  to  compile  definitions  more  or  less 
accurate. 


23 


CHAPTER  IV. 

JOINT  SETTLORS  CREATING  TRUST  FOR  THEIR  ENTIRE  BENEFIT. 

§  19.  Single  Settlor  Creating  Trust  for  Benefit  of  Himself 
and  Another. — We  have  seen  that  a  single  founder  may  create 
a  trust  and  reserve  to  himself  an  interest  less  than  the  fee  of 
the  property  conveyed.  Perhaps  there  has  never  been  a  bona 
fide  attempt  by  a  single  settlor  to  do  anything  more  than  this. 
The  nearest  approach  to  the  contrary  is  found  in  a  case  already 
referred  to,1  where  a  founder  conveyed  to  trustees  his  property 
for  the  benefit  of  scrip-holders  who  were  to  pay  into  the  trust 
fund  the  amounts  for  which  they  were  to  receive  scrip,  the 
settlor  to  be  also  entitled  to  scrip  in  one-half  of  the  whole  capital, 
and,  yet,  it  was  not  the  same,  because  thereby  he  became  a  con- 
tributor to  the  trust  just  as  they.  If  a  settlor,  however,  were 
to  declare  that  his  property  should  be  held  in  trust  with  the 
income  to  be  payable  to  him  during  life  and  made  no  provision 
as  to  what  should  become  of  the  principal  at  his  death,  it  may 
well  be  doubted  whether  that  principal  would  not  be  alienable 
by  him  and  subject  to  his  debts  as  a  present  interest.  However 
that  may  be,  it  is  of  no  special  importance  here. 

§  20.  Several  Settlors  Creating  a  Dry  Trust  for  Their  Own 
Benefit. — Just  as  it  has  been  held  that  a  single  settlor  might 
create  a  trust  in  his  own  property  for  himself  and  others  con- 
tributing a  fund  for  its  better  employment  in  business,  a  fortiori, 
perhaps,  may  it  be  said  that  two  or  more,  one  in  consideration 
of  his  being  joined  by  the  other  or  others,  may  create  a  trust 
fund  or  property,  the  income  out  of  which  shall  be  for  the  several 
benefit  of  the  founders  of  the  fund.  Thus  in  another  Massa- 
chusetts case2  a  trust  was  formed  for  the  convenience  of  an 

IMayo  v.  Moritz  (1890),  151  Mass.  481,  24  N.  E.  1083. 
2Howe  v.  Morse  (1899),  174  Mass.  491,  55  N.  E.  213. 
24 


CHAP.    IV.]  JOINT    SETTLORS.  [§    21. 

unincorporated  association  in  renting  and  selling  land.  The  ex- 
istence of  the  trust  was  evidenced  by  a  declaration  of  trust  that 
certain  land  was  held  by  the  declarants  as  trustees  for  said 
association.  In  this  declaration  the  trustees  appear  as  such  of 
a  dry  or  simple  trust  because  the  entire  management  of  the 
estate  was  committed  to  the  directors  of  the  unincorporated 
association.  It  further  appears  that  the  association  had  a  capital 
stock  divided  into  shares  and  that  the  income  was  to  be  dis- 
tributed as  it  accrued  ratably  among  the  shareholders.  The 
court  held  that  there  was  a  valid  trust  and  that  the  equitable 
interests  represented  in  shares  were  constantly  vendible.  Thus 
it  appears  that,  even  in  and  by  means  of  a  dry  trust,  several 
settlors  may  provide  a  trust  fund  for  their  exclusive  benefit 
without  more,  for  the  trust  declarants  were  not  themselves  the 
founders  of  the  trust,  but  the  shareholders  were.  To  save  the 
trust  against  the  objection  that  it  was  void  under  the  rule  against 
perpetuities,  the  vendibility  of  these  shares  and  their  being  sub- 
ject to  debts  of  the  shareholders  were  relied  upon.  These  facts 
and  the  further  fact  that  the  association  could  at  any  time  direct 
the  trustees  to  sell  the  land  showed  there  was  no  withdrawing 
of  property  from  commerce.  We  shall  hereinafter  see  that 
provision  against  both  objections  may  be  made  by  limiting  the 
duration  of  a  trust. 

'§  21.  Several  Settlors  Creating  a  Dry  Trust  For  Their  Own 
Benefit — Continued, — In  an  earlier  Massachusetts  case3  the  dec- 
laration of  trust  provided  that  the  Executive  Committee  of  an 
unincorporated  joint  stock  association  should  have  general 
management  of  property  vested  in  trustees  with  the  members  to 
be  the  equitable  owners.  The  interest  of  each  member  was  to 
be  represented  by  transferable  shares,  and  their  status  as  cestuis* 
que  trust  was  fully  recognized.  If  a  share  represents  the  entire 
interest  of  a  ccstui  que  trust,  then  a  declaration  of  trust  so  pro- 
viding is  a  means  of  founders  or  settlors  creating  a  trust  for 
their  own  exclusive  benefit,  and  that  the  trust  being  passive  may 
make  these  founders  or  settlors  liable  as  partners  for  its  acts 

SHoadley  v.  County  Comrs.   (1870),  105  Mass.  519. 

25 


§   21.]  JOINT  SETTLORS.  [CHAP.    IV. 

and  contracts  is  another  question.  In  a  later  case4  than  the  one 
last  above  cited  the  court  thus  expressed  itself  as  to  interests 
being  wholly  included  in  transferable  shares:  "The  peculiar 
feature  that  the  interest  of  each  member  may  be  transferred 
without  the  special  assent  of  the  other  members  is  created  by 
agreement  of  the  partners  under  their  natural  rights  at  common 
law."  This  language  was  used  where  the  firm  property  was 
the  equitable  interests  of  its  members  in  property  the  legal  title 
to  which  was  vested  in  trustees  under  a  declaration  of  trust.  It 
may  be  said,  however,  that  there  ought  to  be  no  sensible  distinc- 
tion in  making  an  entire  interest  in  a  legal  estate  represented  by 
a  transferable  certificate  and  doing  the  same  as  to  an  equitable 
interest. 

Another  passive  trust, — passive  at  least  in  the  sense  that  the 
management  of  the  trust  estate  was  to  be  in  a  board  of  managers 
even  though  the  trustee  may  have  been  given  some  special 
powers — is  found  in  another  Massachusetts  case.5  In  the  opin- 
ion by  Judge  Holmes  after  saying  it  was  provided  that:  "The 
decease  of  a  member  of  the  association  shall  not  work  a  dissolu- 
tion of  it  (association),  nor  shall  it  entitle  his  legal  representa- 
tives to  an  account  or  to  take  any  action  in  the  courts  or 
otherwise  against  the  association  or  the  trustees  for  such ;  but 
they  shall  simply  succeed  to  the  right  of  the  deceased  to  the 
certificate  and  the  share  it  represents  subject  to  this  declaration 
of  trust,"  held  there  was  a  partnership  liability  under  such  pro- 
vision against  the  estate  of  a  deceased  shareholder,  because  he 
was  the  owner  of  a  transferable  share  saying:  "When,  as  here, 
a  company  is  made  as  nearly  a  corporation  as  possible,  and  it  is 
obviously  intended  that  the  death  of  a  shareholder  shall  not 
affect  either  the  company  or  the  rights  incident  to  the  share,  we 
think  that  the  liabilities  go  with  the  rights."  It  thus  appears 
that  this  provision  which  specifically  limited  all  beneficial  inter- 
ests to  ownership  of  shares  was  held  to  be  a  valid  provision, 
though  the  shares  were  in  a  fund,  the  legal  title  to  which  was  in 
a  trustee.  The  personal  liability  held  to  exist  in  this  case  de- 

^Gleason  v.  McKay  (1883),  134  Mass.  419. 
SPhillips  v.  Blatchford  (1884),  137  Mass.  510. 
26 


CHAP.  IV.]  JOINT  SETTLORS.  [§   22. 

pended,  as  we  think  will  be  hereafter  shown,  on  the  fact  of 
management  being  reserved  in  the  association. 

In  a  New  York  case6  the  court  did  not  deem  it  necessary  to 
inquire  whether  trustees  were  those  of  a  dry  or  a  special  trust, 
but  it  was  ruled,  that,  in  a  conveyance  from  A  to  B,  C  and  D 
described  as  trustees  of  a  certain  named  land  association,  it 
would  be  presumed  they  held  the  legal  title  for  a  partnership 
of  individuals  dealing  in  real  estate,  in  which  the  grantees  had 
or  may  have  had  a  beneficial  interest.  A  Pennsylvania  case7 
shows  a  dry  or  passive  trust,  the  trustees  of  which  held  the  legal 
title  to  real  estate  in  trust  for  an  association,  the  articles  of  which 
provided  that  the  interest  of  each  member  should  be  determined 
by  the  number  of  shares  he  held,  and  that  the  only  way  he 
could  dispose  thereof  was  by  transfer  on  the  books  of  the  asso- 
ciation. It  was  ruled  that  the  interest  of  each  member  was  per- 
sonal property,  and  no  levy  on  the  real  estate  held  by  the  trustees 
could  affect  the  individual  interest  of  a  member.  This  certainly 
means  the  entire  interest  of  each  cestui  que  trust  was  in  the  shares 
owned  by  him. 

§  22.  Settlors  Creating  Active  Trust  For  Their  Exclusive 
Benefit. — In  a  case  where  there  was  a  declaration  of  trust  by  an 
inventor  in  favor  of  himself  and  other  scrip  holders  in  an  unin- 
corporated association,  as  cestui  que  trust,  his  and  their  inter- 
ests therein  to  be  represented  by  scrip  or  certificates  of  stock,8 
the  complete  control  and  management  of  the  property  was  to 
follow  the  vesting  of  the  legal  title  in  the  trustees.  Gleason  v. 
McKay  and  Phillips  v.  Blatchford,  supra,  were  distinguished, 
the  court,  composed  of  practically  the  same  members  as  in  those 
cases,  saying:  "This  deed  does  not  have  the  effect  to  make  the 
scrip  holders  partners.  It  does  not  contemplate  the  carrying  on  of 
a  partnership  business  upon  the  joint  account  of  the  grantor  and 
the  scrip  holders,  and  in  this  respect  the  case  is  unlike"  those 

6King  v.  Townshend  (1894),  141  N.  Y.  358,  36  N.  E.  513. 
TPittsburg  Wagon    Works'   Estate    (1903),   204   Pa.   432,   54   Atl. 
316. 

SMayo  v.  Moritz  (1890),  151  Mass.  481,  24  N.  E.  1083. 

27 


§  23.]  JOINT  SETTLORS.  [CHAP.   IV. 

cases.  But  it  can  hardly  be  said  the  grantor  was  the  sole  founder 
of  the  trust,  because  the  fund  was  contributed  to  by  him  and 
the  scrip  holders  and  yet  it  was  said  "the  invention  is  held  in 
trust  and  is  trust  property".  The  evident  distinction  is  that 
the  trust  was  an  active  one  under  the  entire  control  of  the 
trustees,  while  the  partnerships  in  the  other  cases  actually  oper- 
ated the  trust  property  as  a  business,  while  the  trustees  were 
merely  holders  of  title.  But  in  the  three  cases  the  interests 
were  represented  by  transferable  shares. 

The  same  idea  of  vesting  absolute  control  in  trustees  divesting 
the  business  of  its  partnership  character,  though  its  cestuis  que 
trust  constitute  an  association  we  have  seen  to  have  been  ex- 
pressed in  a  noted  English  case.9  In  this  case  the  members 
were  held  to  be  mere  investors  carrying  on  no  business  that 
would  bring  them  under  the  English  Winding  Up  Acts  relating 
to  partnerships.  It  is  true  that  the  only  question  involved  in 
these  cases  was  as  to  personal  liability  of  certificate  or  scrip 
holders,  but  it  was  necessary  to  adjudge  validity  of  the  trust 
to  hold  the  cestui  que  trust  released  from  liability. 

§  23.  Settlors  Creating  Active  Trust  For  Their  Exclusive 
Benefit — Continued. — In  a  case  decided  by  the  Federal  Supreme 
Court10  it  is  recited,  that  a  joint  stock  company,  an  unincor- 
porated association  was  formed  in  1836  by  several  persons  for 
the  purpose  of  dealing  in  the  purchase  and  sale  of  lands.  By 
the  articles  of  association  the  lands  purchased  were  to  be  con- 
veyed to  trustees  to  hold  as  joint  tenants  in  trust  for  the  mem- 
bers of  the  association.  Its  capital  was  divided  into  forty-eight 
shares  and  was  held  in  unequal  parts  according  to  sums  severally 
contributed  by  the  members.  The  trustees  were  vested  with 
entire  control  during  the  continuance  of  the  trust,  which  was 
to  cease  when  enough  money  was  realized  from  sales  by  the 
trustees  to  satisfy  all  the  purchase  money,  improvements,  inter- 
est, taxes  and  assessments,  and  a  division  of  the  lands,  if  any 

9Smith  v.  Anderson,  15   Ch.  D.  247.  Ante.   §§   10-11. 
lOClagett   v.    Kilbourne    (1861),   66   U.   S.    (1    Black)    346,    17    L. 
Ed.  213. 
28 


CHAP.  IV.]  JOINT  SETTLORS.  [§   24. 

remaining,  was  to  be  among  the  shareholders.  A  judgment 
creditor  of  one  of  the  shareholders  owning  one-sixth  of  the 
total  shares  levied  on  certain  lots,  the  legal  title  to  which  was 
in  the  trustees,  and  they  were  sold  to  him  at  the  sheriff's  sale. 
He  then  brought  ejectment  against  the  purchaser  of  these  lots 
from  the  trustees.  The  court  said:  "The  proceeding  assumes 
that  the  share  of  the  judgment  debtor  in  the  association  is  an 
interest  in  lands;  and  though  the  legal  title  be  in  the  trustees, 
is  liable  to  be  seized  on  the  execution  and  sold  and  the  pur- 
chaser put  in  possession.  The  settled  law  is  otherwise.  *  *  *  * 
In  this  case  the  legal  title  is  in  the  trustees  who  are  bound  to 
account  to  the  stockholders,  the  cestuis  que  trust,  according  to 
their  respective  shares  after  all  the  debts  of  the  association  have 
been  paid."  It  seems  as  clear  here,  as  is  possible  to  make  the 
matter,  that  a  trust  designed  by  founders  for  their  exclusive 
interest  as  shareholders  of  an  association  was  recognized  as  a 
valid  trust,  under  the  active  management  of  a  trustee.  The 
court  said:  "It  is  quite  clear  the  plaintiff  has  mistaken  his  rem- 
edy, as  he  obtained  no  title,  legal  or  equitable,  to  the  particular 
lots  in  question." 

§  24.  Settlors  Creating  Active  Trust  For  Their  Exclusive 
Benefit — Continued. — In  an  Illinois  case11  several  persons  en- 
tered into  a  written  agreement  to  engage  in  the  business  of  buy- 
ing, improving  and  selling  business  property  and  by  the  agree- 
ment they  appointed  three  of  their  number  trustees  to  take  legal 
title  to  land  purchased  and  to  subdivide  and  sell  same,  exercis- 
ing general  control  of  the  affairs  of  the  association.  There  was 
to  be  capital  stock  divided  into  shares.  The  agreement 
reserved  the  right  to  give  directions  to  the  trustees  at  a  general 
meeting  of  shareholders  by  a  majority  vote,  or  to  remove  a 
trusteee  by  a  two-thirds  vote.  The  question  at  bar  was  whether 
a  deed  for  a  purchase  by  the  trustees  at  sheriff's  sale  running  to 
(A  B  and  C)  "trustees  of  the  Norwood  Land  and  Building  As- 
sociation'' and  "to  their  heirs  and  assigns  forever"  was  to  be 
taken  as  conveying  an  absolute  title  to  A  B  and  C  individually, 
or  if  they  took  the  land  in  trust  and  if  in  trust  was  the  convey- 

liHart  v.  Seymour  (1893),  147  111.  598,  35  N.  E.  246. 

29 


§  25.]  SUMMARY.  [CHAP.  iv. 

ance  void.  The  court  holding  first  that  the  word  "trustees  etc. 
was  not  descriptio  personarum  merely,  unless  there  was  incapacity 
in  the  beneficiary  to  take,  thought  that  there  was  no  incapacity, 
and  the  members  of  a  co-partnership  acquired  interests  "to  be 
determined  by  the  trust  agreement  and  by  that  alone."  The 
court  said  also:  "There  can  be  no  doubt  that  the  trust  thus 
created  was  an  active  one,  and  one  which  involved  the  exercise 
of  powers  and  the  performance  of  duties  which  rendered  it 
necessary  that  the  trustees  should  hold  the  legal  title,  in  order 
to  secure  the  performance  of  such  duties  and  the  execution  of 
such  powers,"  which  fact,  as  distinguishing  a  conveyance  to  a 
trustee  of  an  active  trust  from  a  trustee  of  a  dry  trust,  operates, 
as  held  in  some  states,  to  make  "the  trusts  or  uses  remain  mere 
equitable  estates." 

§  25.  Summary. — This  character  of  cases  both  as  to  dry 
and  active  trusts  might  be  extended  at  greatly  more  length,  but, 
after  all,  these  cases  would  be  merely  illustrative  of  the  applica- 
tion of  well-known  principles.  It  is  deemed,  therefore,  suf- 
ficiently shown,  that  there  is  no  more  novelty  in  claiming  that 
two  or  more  founders  or  settlors  may  create  a  trust  fund  of 
property,  the  entire  interest  in  which  may  be  vested  in  them- 
selves severally,  than  that  the  capital  stock  of  a  corporation  may 
be  vested  in  its  shareholders,  and  the  title  to  the  capital  or  prin- 
cipal may  be  in  the  trustees  they  appoint  just  as  it  is  in  a  cor- 
poration. With  these  questions  settled,  as  it  appears  to  the 
author  they  are  settled,  the  various  relations  parties  to  a  trust 
agreement  for  an  active  business  trust  bear  to  the  trust,  to  each 
other  and  to  third  persons  for  its  acts  and  contracts,  may  now 
be  considered. 


30 


CHAPTER  V. 
.  LIABILITY  OF  TRUSTEE  OF  AN  ACTIVE  TRUST. 

§  26.  Independent  Status  of  a  Trustee. — As  to  how  a  trustee 
stands  to  a  trust  estate,  to  creditors  and  to  beneficiaries  or 
cestitis  que  trust,  has  not  been  found  anywhere  more  tersely  and 
yet  more  comprehensively  expressed  than  by  Justice  Woods  of 
the  Federal  Supreme  Court.1  The  learned  Justice  said:  "A 
trustee  is  not  an  agent.  An  agent  represents  and  acts  for  his 
principal  who  may  be  either  a  natural  or  artificial  person.  A 
trustee  may  be  defined,  generally,  as  a  person  in  whom  some 
estate,  interest  or  power  in  or  affecting  property  is  vested  for 
the  benefit  of  another.  When  an  agent  contracts  for  his  prin- 
cipal, the  principal  contracts  and  is  bound,  but  the  agent  is  not. 
When  a  trustee  contracts,  as  such,  unless  he  is  bound,  no  one  is 
bound,  for  he  has  no  principal.  The  trust  estate  cannot  promise ; 
the  contract  is,  therefore,  the  personal  undertaking  of  the  trustee. 
As  a  trustee  holds  the  estate,  although  only  with  the  power  and 
for  the  purpose  of  managing  it,  he  is  personally  bound  by  the 
contracts  he  makes  as  trustee,  even  when  designating  himself 
as  such.  The  mere  use  by  the  promissor  of  the  name  of  trustee 
or  any  other  name  of  office  or  employment  will  not  discharge 
him.  Of  course,  when  a  trustee  acts  in  good  faith  for  the 
benefit  of  the  trust,  he  is  entitled  to  indemnify  himself  for  his 
engagements  out  of  the  estate  in  his  hands,  and  for  this  purpose 
a  credit  for  his  expenditures  will  be  allowed  in  his  accounts  by 
the  court  having  jurisdiction  thereof.  If  a  trustee  contracting 
for  the  benefit  of  a  trust  wants  to  protect  himself  from  indivi- 
dual liability  on  the  contract,  he  must  stipulate  that  he  is  not 
to  be  personally  responsible,  but  that  the  other  party  is  to  look 
solely  to  the  trust  estate." 

ITaylor  v.  Davis   (1884),  110  U.  S.  330,  334,  28  L.  Ed.  163. 

31 


§   28.]  LIABILITY  OF  TRUSTEE.  [CHAP.   V. 

§  27.  Independent  Status  of  a  Trustee — Continued. — In 
the  case  from  which  the  foregoing  excerpt  is  taken  it  appears 
that  there  was  an  action  at  law  upon  a  written  promise  by 
trustees  under  a  deed  of  settlement  to  pay  certain  demands  of 
a  former  trustee  against  the  trust  estate  out  of  moneys  coming 
into  the  hands  of  the  trustees,  as  such.  This  coming  into  their 
hands  of  such  moneys  was  shown  and  the  judgment  of  the  lower 
court  against  the  trustees,  personally,  was  affirmed.  The  prin- 
ciple of  personal  liability  is  thus  expressed  by  a  standard  work:2 
"In  the  present  state  of  the  law,  no  trustee  could  be  advised,  under 
any  circumstances,  to  undertake  the  responsibility  of  carrying  on 
any  trade  for  others.  For  by  so  doing  he  adopts  the  same  risks 
and  liabilities  as  persons  who  trade  on  their  own  account,  while 
he  can  participate  in  none  of  the  profits;  and,  as  a  matter  of 
ordinary  prudence,  a  trust  for  such  a  purpose  should  be  unhesi- 
tatingly declined."  This  consideration  no  doubt  has  been  the 
main  reason  why  corporate  organization  has  been  preferred  to 
trusts  for  carrying  on  trade.  But  in  the  evolution  of  business 
methods,  especially,  we  may  say,  in  the  growth  of  indemnity 
insurance  and  express  stipulation  against  liability,  in  a  personal 
way,  the  conclusion,  that  was  drawn  fifty  years  ago  from  the 
existence  of  the  principle  stated,  may  be  greatly  qualified  now. 

§  28.  Rule  of  Trustees'  Personal  Liability  Stringent. — As 
seen  in  the  closing  sentence  of  the  excerpt  from  Taylor  v.  Davis, 
supra,  the  trustee  must  stipulate  not  to  be  personally  liable  or 
he  will  be  so  held.  This  is  with  equal  emphasis  announced  in 
many  other  cases,  some  of  which  we  proceed  to  set  forth.  Thus 
in  a  case  from  Rhode  Island,3  the  trustees  indorsed  a  promissory 
note.  They  were  sued  at  law  as  individuals.  They  pleaded  it 
was  their  duty  under  the  will  of  the  founder  of  the  trust  to 
indorse  negotiable  paper  of  certain  corporations  of  which  the 
maker  of  the  note  in  suit  was  one,  and  the  suit,  so  far  as  the 
indorsers  were  concerned,  should  be  brought  in  equity,  it  being 
also  averred  that  plaintiff,  holder  of  the  note,  knew  at  the  time 

2Hill  on  Trustees  (4th  Am.  Ed.  1867)  534. 

3Roger   Williams   Nat'l.   Bank  v.   Groton   Manfg.   Co.    (1889),   16 
R.  I.  504,  17  Atl.  170. 
32 


CHAP.    V.]  STIPULATIONS    AGAINST    LIABILITY.  [§    29. 

of  its  issue  of  the  provisions  of  said  will.  The  Supreme  Court 
upheld  the  ruling  of  the  lower  court,  sustaining  a  demurrer 
to  said  plea  and  rendering  judgment  against  the  trustees,  per- 
sonally, citing  a  great  number  of  cases.4  The  opinion  says : 
"Although  it  has  sometimes  been  stated  as  a  reason  why  the 
trustee  is  held  personally  liable  upon  his  contracts  as  trustee, 
is  because  he  has  no  power  to  bind  the  trust  estate,  he  being 
likened  to  an  agent  who  has  exceeded  his  authority,  we  think 
the  true  reason  why  he  is  held  personally  liable  on  such  con- 
tracts is  that  he  has  no  principal,  or,  rather,  he  is  the  principal 
himself.  The  contract  is  therefore  necessarily  his  and  his 
alone.  But,  however  this  may  be,  we  do  not  think  that  the 
fact  that  the  defendant  trustees  were  empowered  by  the  will, 
and  it  was  made  their  duty  to  indorse  the  notes  in  suit,  is 
sufficient  to  relieve  them  from  personal  liability  upon  their  in- 
dorsements, they  not  having  stipulated  that  they  were  not  to 
be  so  liable."  It  was  urged  by  counsel  for  the  trustees  that  to 
hold  them  personally  liable  "is  to  punish  them  for  the  faithful 
performance,  within  the  limits  of  their  powers,  of  the  trust 
imposed  on  them,  well  known  to  the  plaintiff."  The  court  as 
to  this,  said :  "The  situation  of  the  trustees,  if  the  trust  estate  be 
insufficient  to  indemnify  them  fully  for  the  debts  which  they  have 
contracted,  is  indeed  hard,  but  it  is  one  in  which  they  have  volun- 
tarily placed  themselves,  and,  though  we  may  sympathize  with 
them,  we  cannot  on  that  account  relax  the  rules  of  law  in  their 
behalf." 

§  29.    Stipulation  Effective  Against  Personal  Liability. — The 
foregoing   cases   may   be    thought   necessarily   to   indicate   that 

4Fogg  v.  Virgin,  19  Me.  352;  Blackstone  National  Bank  v. 
Lane,  19  Me.  352,  13  Atl.  683;  Comes  v.  Clark,  12  Cal.  168;  Taft  v. 
Brewster,  9  Johns.  334;  Hills  v.  Bannister  &  Butler,  8  Cow.  31; 
New  v.  Nicoll,  73  N.  Y.  127;  Thacher  v.  Dinsmore,  5  Mass.  299; 
Forster  v.  Fuller,  6  Mass.  58;  Fiske  v.  Eldridge,  12  Gray  474;  Pack- 
ard v.  Nye,  2  Mete.  47;  Bloom  v.  Wolf,  50  Iowa  286;  Hayes  v. 
Crutcher,  54  Ind.  260;  Hayes  et  al.  v.  Matthews,  63  Ind.  412;  Bing- 
ham  v.  Stewart,  13  Min.  106;  Wren  v.  Hoffman,  41  Miss.  616;  Aven 
v.  Beckom,  11  Ga.  1;  Johnson  v.  Gaines,  8  Ala.  791. 

33 


§     30.]  STIPULATIONS    AGAINST    LIABILITY.  [CHAP.    V. 

there  is  no  method  of  a  trustee  avoiding  personal  liability  where 
he  makes  a  contract  in  behalf  of  a  trust  estate,  unless  he  stipu- 
lates with  the  other  party  to  a  contract  that  only  the  trust 
estate  shall  be  liable.  They  do  not  decide,  except  argumentat- 
ively,  however,  that  he  may  be  saved  from  personal  liability  by 
expressly  stipulating  therefor.  There  are  a  number  of  cases, 
however,  where  this  question  was  directly  involved.  Thus  in 
a  case  from  North  Carolina,5  a  trustee  was  sued  personally  for 
goods  ordered,  as  trustee,  and  so  charged  to  him  on  plaintiff's 
books.  Defendant  testified  that  before  purchasing  he  had  an 
agreement  with  plaintiff  for  the  trust  estate  to  be  solely  liable, 
and  this  was  denied  by  plaintiff  as  a  witness.  The  court  in- 
structed that  the  burden  was  on  plaintiff  to  show  that  the  sale 
was  to  defendant  individually,  and  there  was  a  verdict  for 
defendant.  The  case  was  reversed,  the  court  saying:  "In  this 
(instruction)  we  think  there  was  error.  The  answer  of  de- 
fendant was  in  the  nature  of  a  plea  of  confession  and  avoidance. 
Having  admitted  that  he  obtained  the  goods,  he  assumed  the 
burden,  and  nothing  else  appearing,  the  plaintiff  would  be 
entitled  to  judgment.  A  trustee  purchasing  goods,  or  incurring 
any  other  liability  on  account  of  his  trust,  is  personally  liable 
for  the  payment  thereof  unless  his  liability  is  limited  by  an 
agreement,  expressed  or  implied,  with  the  creditor.  The  liability 
of  the  trust  estate  is  not  now  before  us,  the  only  question  being 
the  individual  liability  of  the  defendant.  It  is  admitted  the 
defendant  might  have  limited  his  liability  by  such  an  agreement 
with  the  plaintiff  as  he  alleges,  but  having  alleged  such  an 
agreement  he  must  prove  it."  The  case  therefore  was  remanded, 
defendant  to  prove  the  agreement  alleged,  if  he  could. 

§  30.  Stipulation  Effective  Against  Personal  Liability — Con- 
tinued.— In  a  Massachusetts  case,6  defendants  were  sued  at  law 
on  a  promissory  note,  which  in  the  body  thereof  stated  that 
"we  as  trustees,  but  not  individually,  promise"  etc.,  and  then 
signed  their  names  with  the  word  "Trustees"  added.  The  court 

SMitchell  &  Co.  v.  Whitlock  (1897),  121  N.  C.  166,  28  S.  E.  292. 
«Shoe  &  Leather  Nat'l.  Bank  v.  Dix  (1877),  123  Mass.  148. 
34 


CHAP.    V.]  STIPULATIONS    AGAINST    LIABILITY.  [§    31. 

said :  "If  a  party  in  a  contract  into  which  he  voluntarily  enters, 
and  not  in  the  execution  of  any  official  trust  or  duty,  makes  it 
an  express  stipulation  that  he  is  acting  for  somebody  else  and 
in  no  event  to  be  personally  liable,  he  certainly  cannot  be  ren- 
dered so  by  law."  The  words  of  the  note  were  held  an  express 
stipulation  to  this  effect.  It  was  urged  "that  if  these  defend- 
ants are  not  liable  on  the  contract  as  a  note,  then  nobody  is 
liable."  The  court  replied:  "Even  if  such  were  the  fact,  it 
would  not  be  in  the  power  of  the  court,  as  we  have  already  seen, 
to  alter  the  contract  for  the  purpose  of  giving  it  validity.  In 
deciding  whether  the  defendants  have  or  have  not  bound  them- 
selves, we  need  not  decide  whether  they  have  or  have  not 
bound  their  principals."  This  case  was  approved  in  a  later  de- 
cision by  the  same  court.7 

§  31.  Stipulation  Effective  Against  Personal  Liability — Con- 
tinued.— It  would  seem  a  work  of  supererogation  to  extend  the 
citation  of  authority  any  further  on  this  subject,  especially  as 
cases  referred  to  hereafter  necessarily  go  upon  the  necessary 
presumption,  that  a  stipulation  of  this  kind  is  valid,  but  the 
observation  of  a  distinguished  Federal  Circuit  Judge,  in  a  case 
in  which  his  opinion  was  pointedly  approved  by  the  Circuit 
Court  of  Appeals,8  is  so  apt  that  it  ought  not  to  be  omitted.  In 
this  case  a  promissory  note  was  sued  upon.  It  read :  "Sixty 
days  after  date  the  trustee  of  the  Topeka  Land  &  Development 
Company,  as  such  trustee  under  declaration  of  trust,  dated  May 
23,  1887,  and  not  otherwise,  promise  to  pay"  etc.,  and  signed 
by  the  trustee  with  the  words  "as  trustee  as  aforesaid"  following 
his  signature.  Judge  Putnam  said:  "The  only  question  is 
whether  or  not  this  implied  stipulation  of  the  plaintiff,  limiting 
its  remedy  to  the  general  assets  of  the  association  and  the  prop- 
erty especially  pledged  to  it,  is  contrary  to  the  rules  of  law.  Of 
course,  a  stipulation  in  an  instrument  which  fundamentally  vio- 
lates its  essential  nature  must  sometimes  be  rejected  by  the 

THussey  v.  Arnold  (1904),  185  Mass.  202,  70  N.  E.  87. 
SBank  of   Topeka  v.   Eaton    (1900),   100   Fed.   8;   affd.   107   Fed. 
1003,  47  C.  C.  A.  140. 

35 


§    32.]  STIPULATIONS    AGAINST    LIABILITY.  [CHAP.    V, 

courts.  For  instance,  if  any  individual  or  partnership  should 
stipulate  in  this  or  its  pecuniary  obligations  that  he  or  it  should 
not  be  personally  liable  thereon,  without  at  the  same  time  mort- 
gaging or  pledging  property  or  giving  some  other  specific  lien 
for  security,  it  might  be  difficult  for  the  law  to  regard  the  stipu- 
lation, because  in  that  event,  as  there  would  be  no  lien  which 
the  law  could  enforce,  the  holder  of  the  obligation  would  be 
left  without  remedy,  unless  he  could  proceed  by  judgment 
against  the  obligor;  and  the  result,  if  sustained,  would  be  an 
obligation,  which  in  law  is  no  obligation.  The  present  case, 
however,  assimilates  itself  to  the  large  class  of  cases,  where 
certain  property  being  pledged  in  some  form  for  the  security  of 
a  debt,  the  parties  have  been  at  liberty  to  stipulate  that  the  owner 
of  the  debt  should  look  only  to  the  property  thus  pledged.  In 
the  present  case,  not  only  did  the  Bank  of  Topeka  have  specific 
assets  given  to  it  for  its  security,  but  the  entire  property  of  the 
association  was  held  in  trust,  and  therefore  subject  to  adminis- 
tration by  the  Chancery  Courts,  which  could  apply  it  equitably 
and  proportionally  to  the  discharge  of  obligations  of  the  trustee, 
as  contemplated  by  the  express  direction  of  the  Articles  of  Asso- 
ciation that  the  debtors  of  the  trust  should  look  for  payment 
solely  to  its  property." 

§  32.  Discussion  of  Above  Ruling. — This  excerpt  embraces 
some  matters  to  be  hereinafter  considered,  for  example,  respons- 
ibility of  the  trust  estate  for  the  acts  and  contracts  of  the  trustee, 
but  the  reason  of  the  rule  for  the  validity  of  a  stipulation  for 
exemption  of  a  trustee  from  personal  liability  is  so  well  ex- 
pressed, where  the  question  of  that  validity  was  directly  in- 
volved, that  it  ought  to  appear.  By  that  reason  it  is  shown  that 
the  power  of  a  Court  of  Equity  over  a  trust  estate  places  it 
where  it  stands  like  property  specifically  pledged.  It  may  be 
placed  out  of  reach  of  creditors,  possibly,  by  sale  or  disposal  by 
the  trustee,  but  not  by  the  mere  creation  of  indebtedness,  where 
vigilant  creditors  would  secure  advantages  over  others,  but  if 
misfeasance  or  nonfeasance  were  wasting  assets,  a  Court  of 
Equity  might  interpose.  In  a  word  a  trust  estate  is  always 
actually  or  potentially  in  the  custody  of  a  Court  of  Equity, 
36 


CHAP.    V.]  LIABILITY    OF    TRUSTEE    FOR    TORTS.  [§    34. 

and  for  this  reason  its  trustee  may  stipulate  for  exemption  from 
personal  liability  in  its  management.  The  rule  is  not  an  unrea- 
sonable one  as  to  indebtedness  rightfully  created  under  the 
provisions  of  an  instrument  creating  a  trust,  and,  if  the  indebt- 
edness is  not  of  that  character,  the  creditor  may  be  in  fault  in 
permitting  it  to  be  incurred  under  color  of  authority. 

§  33.  Liability  of  Trustee  For  Negligence  in  Management 
of  a  Trust  Estate. — That  trustees  are  liable  in  their  personal 
capacity  for  acts  of  negligence  seems  not  seriously  disputed. 
Generally  the  question  is  whether  or  not  the  estate  he  represents 
is  also  liable.  Thus  in  a  North  Carolina  case9  an  action  at  law 
was  brought  where  a  railway  company  leased  to  a  trustee  and 
operated  by  him  was  sued  as  also  was  the  trustee,  in  his  of- 
ficial capacity.  It  was  chiefly  urged  that  the  latter  could  not 
be  sued  in  his  official  capacity  and  the  trust  estate  held  respons- 
ible for  his  negligence.  The  court  in  this  case  held  the  trust 
estate  liable  as  an  exception  to  the  general  rule,  that  only  the 
trustee  would  be  liable  saying  in  reference  to  Taylor  v.  Davis, 
supra,  and  Mitchell  v.  Whitlock10  that:  "In  neither  of  these 
cases  was  it  held  that  the  trust  estate  could  not  also  be  held 
responsible  to  the  creditor.  *  *  *  *  And  in  the  present  case,  no 
doubt,  the  defendant  Morrow  (Trustee)  could  have  been  sued 
and  held  liable  as  an  individual,  because  the  intestate  was  one 
of  his  employees."  This  case  will  be  again  referred  to  when 
the  question  of  liability  of  the  trust  estate  is  considered. 

§  34.  Liability  of  Trustee  For  Negligence  in  Management 
of  a  Trust  Estate — Continued. — In  a  Rhode  Island  case,11  non- 
liability of  the  trust  estate  was  held  in  a  cause  of  action  arising 
out  of  negligence  by  the  servants  of  the  trustee,  the  court 
reasoning  as  follows:  "The  declaration  shows  that  the  legal 
title  to  the  premises  in  front  of  which  the  accident  happened 

»Wright  v.  Caney  River  Ry.  Co.  (1909),  151  N.  C.  529,  66  S.  E. 
588,  19  Am.  &  Eng.  Anno.  Cas.  384. 

10(1897)   121  N.  C.  166,  28  S.  E.  292. 

llParmenter  v.  Barstow  (1900),  22  R.  I.  245,  47  Atl.  365,  63  L. 
R.  A.  227. 

37 


§    35.]  LIABILITY    OF    TRUSTEE    FOR    TORTS.  [CHAP.    V. 

was  in  the  defendants  at  the  time  of  the  happening  thereof, 
and  that  they  were  in  the  possession  and  control  thereof.  And, 
while  it  appears  from  the  declaration  that  the  beneficial  interest 
in  the  estate  belongs  to  others,  yet,  as  the  absolute  legal  title 
thereto  is  vested  in  the  defendants,  the  law  devolves  upon 
them,  in  their  personal  capacity,  all  of  the  ordinary  duties  and 
liabilities  which  are  incident  to  the  ownership  of  real  estate. 
They  are  not  the  agents  of  the  beneficiaries,  for  a  trustee  is 
not  an  agent,  in  the  strict  sense  of  the  term,  and  hence  the 
relation  of  master  and  servant  does  not  exist,  so  that  the  liabil- 
ities which  trustees  incur  by  their  misconduct  or  negligence 
are  personal  liabilities."  In  a  Massachusetts  case12  the  trustees 
were  sued  for  negligence  in  the  running  of  a  railroad.  These 
trustees  were  such  under  a  mortgage  for  the  benefit  of  bond- 
holders and  upon  default  entered  into  possession  and  continued 
its  operation  under  a  verbal  agreement.  It  was  held  that,  as 
the  trustees  were  in  control  with  no  superior  power  above 
them,  they  therefore  were  principals.  It  is  to  be  said  of  this 
case,  that  the  trustee  idea  is  not  dominant,  but  the  fact  that 
those,  who  were  trustees,  were  put  in  control  as  individuals. 

§  35.  Liability  of  Trustee  For  Negligence  in  Management 
of  a  Trust  Estate — Continued. — In  an  English  case,13  the  only 
question  was  whether  or  not  a  judgment  creditor  of  the  trustee 
sued  in  tort  for  negligence  arising  out  of  his  acts  as  a  trustee 
could  have  his  judgment  satisfied  out  of  the  trust  estate.  The 
case  ruled  that,  if  the  trustee  having  paid  such  a  judgment  was 
entitled  to  indemnity,  then  the  creditor  should  not  be  made  to 
"go  through  the  double  process  of  suing  the  trustee,  recovering 
the  damages  from  him  and  leaving  the  trustee  to  recoup  him- 
self out  of  the  trust  estate."  This  case  shows  that  the  liability 
of  the  trustee  may  be  more  extensive  than  the  liability  of  the 
trust  estate,  whether  to  the  trustee  for  indemnity  or  to  the 
party  to  whom  he  has  become  individually  liable.  Recovery 
by  either  from  the  trust  estate  is  based  on  the  trustee's  right 

l2Ballou  v.  Farnum  (1864),  9  Allen  47. 
I31n  re  Raybould  (1900),  1  Ch.  199,  82  L.  T.  N.  S.  46. 
38 


CHAP.  V.]  SUMMARY.  [§  37. 

to   indemnity  and   that  depends   on   whether   the   trustee   "has 
acted  with  due  diligence  and  reasonably."14 

§  36.  Liability  of  Trustee  For  Negligence  in  Management 
of  a  Trust  Estate — Continued. — In  anothier  Massachusetts 
case,15  there  was  an  action  brought  against  a  corporation  for 
negligence  of  the  janitor  of  a  building  leased  to  it.  Several 
months  after  the  lease  an  assignment  was  executed  to  certain 
trustees  "giving  them  full  power  and  authority  to  hold,  manage 
and  control  the  property  for  the  remainder  of  the  term  under 
certain  trusts,  for  the  benefit  of  assignor  and  others."  Accord- 
ing to  the  terms  of  this  instrument,  neither  the  defendant  nor 
anybody  else  had  any  right  to  interfere  with  the  management 
and  control  of  the  trustees  so  long  as  they  properly  executed 
their  trust,  and  the  trustees  were  not  accountable  for  their  con- 
duct of  the  business,  except  for  the  proper  performance  of 
their  duties  under  the  instrument.  The  court  said:  "It  is 
plain  the  janitor  was  their  servant  and  not  the  servant  of  the 
defendant.  If  there  was  any  liability  of  a  master  for  his  con- 
duct as  a  servant  Mr.  B.  and  Mr.  H.  (Trustees)  were  liable  and 
not  the  defendant." 

§  37.  Summary. — These  illustrative  cases,  announcing  well 
settled  principles,  enable  us  to  take  up  the  next  subject  in  the 
development  of  our  purpose,  viz:  The  right  of  the  trustee  to  in- 
demnity out  of  the  trust  estate. 


I4lbid. 

iSFalardeau  v.  Boston  Art  Students'  Assoc,  (1903),  182  Mass. 
405,  65  N.  E.  797.  See  also  Curry  v.  Dorr  (1912),  210  Mass.  430, 
97  N.  E.  87. 

39 


CHAPTER  VI. 
TRUSTEE'S  RIGHT  OF  INDEMNITY. 

§  38.  Preliminary  Observations. — Necessarily  as  this  woik 
progresses  in  the  manner  adopted  for  the  clearer  establishment 
of  the  propositions  in  its  text,  that  is  to  say,  by  copious  excerpts 
from  decided  cases,  many  things  are  quoted  which  forecast 
what  is  to  be  repeated  further  along.  This,  it  is  thought,  should 
not  be  regarded  as  redundancy,  because  in  every  excerpt  there 
is  obviated  the  objection  that  the  proposition  stated  is  not  sup- 
ported by  the  context  in  which  the  principle  is  found.  In  this 
way  the  authorities  relied  on  may  be  distinguished  or  found  to 
be  adequate  or  not. 

§  39.  Trustees'  Right  of  Indemnity. — Recurring  to  the  lan- 
guage of  Justice  Woods,1  we  see  that  he  announces,  generally, 
that:  "When  a  trustee  contracts,  unless  he  is  bound,  no  one  is 
bound,  for  he  has  no  principal,"  and  "the  trust  estate  cannot 
promise."  Nevertheless,  the  learned  Justice  further  says  in  ef- 
fect that  the  trustee  may  lawfully  stipulate  for  freedom  from 
personal  liability,  and  that  "the  other  party  is  to  look  solely  to 
the  trust  estate."  Also  in  this  case,  which  showed  a  surrender 
by  one  trustee  to  the  others,  upon  their  promise,  held  to  be  per- 
sonal, to  pay  him  what  the  trust  estate  was  indebted  to  him,  the 
retiring  trustee  "had  the  right  (which  he  waived)  to  keep  pos- 
session of  the  trust  estate  until  he  was  paid."  Therefore,  here 
is  indicated  the  trustee's  right  of  indemnity.  Therefore,  also, 
a  trustee  is  not  held  to  a  mere  expenditure  of  income  from  a 
trust  estate,  with  no  power  to  contract  indebtedness  in  advance 
of  the  accrual  and  collection  of  that  income,  unless,  at  least, 
the  creating  instrument  specifically  forbids  him  to  anticipate 
income.  In  English  cases,  that,  to  which  Justice  Woods  thus 

ITaylor  v.  Davis  (1884),  110  U.  S.  330,  334,  28  L.  Ed.  163. 
40 


CHAP,  vi.]  TRUSTEE'S  INDEMNITY.  [§  39. 

merely  alludes,  is  discovered  to  be  the  only  basis  of  a  trust 
estate's  liability  to  third  persons.  Thus  in  a  case  decided  in 
1880  by  Jessel  M.  R.,2  where  an  executor  was  directed  to  employ 
a  specific  portion  of  the  estate  of  his  testator  in  carrying  on  his 
trade,  summonses  were  sued  out  by  several  creditors  for  goods 
supplied  to  the  executor  in  carrying  on  this  trade,  to  establish 
their  claims  against  the  trust  estate.  These  summonses  were 
dismissed,  with  leave  to  the  creditors  to  present  intervening 
petitions.  The  Master  of  Rolls  said :  "I  understand  the  doctrine 
to  be,  that  where  a  trustee  is  authorized  by  a  testator,  or  by  a 
settlor — for  it  makes  no  difference — to  carry  on  a  business  with 
certain  funds  which  he  gives  to  the  trustee  for  that  purpose,  the 
creditor  who  trusts  the  executor  has  a  right  to  say  'I  had  the 
personal  liability  of  the  man  I  trusted  and  I  also  have  the  right 
to  be  put  in  his  place  against  the  assets;  that  is,  I  have  a  right 
to  the  benefit  of  indemnity  or  lien  which  he  has  against  the 
assets  devoted  to  the  purposes  of  the  trade/  The  first  right  is 
his  general  right  by  contract,  because  he  trusted  the  trustee  or 
executor;  he  has  a  personal  right  to  sue  him  and  to  get  judgment 
and  make  him  a  bankrupt.  The  second  right  is  a  mere  corollary 
to  those  numerous  cases  in  Equity  in  which  persons  are  allowed 
to  follow  trust  assets.  The  trust  assets  having  been  devoted  to 
carrying  on  the  trade,  it  would  not  be  right  that  the  cestui  que 
trust  should  get  the  benefit  of  the  trade  without  paying  the  li- 
abilities; therefore  the  court  says  to  him:  'You  shall  not  set 
up  a  trustee  who  may  be  a  man  of  straw  and  make  him  a  bank- 
rupt to  avoid  the  responsibility  of  the  assets  for  carrying  on 
the  trade.  The  court  puts  the  creditor,  so  to  speak,  as  I  under- 
stand it,  in  the  place  of  the  trustee.  But,  if  the  trustee  has 
wronged  the  estate,  that  is,  if  he  has  taken  money  out  of  the 
assets  more  than  sufficient  to  pay  the  debts,  and  instead  of 
applying  them  to  the  payment  of  the  debts,  has  put  them  into 
his  own  pocket,  then  it  appears  to  me  there  is  no  such  equity, 
because  the  cestuis  que  trust  are  not  taking  the  benefit.  The 
trustee  having  pocketed  the  money,  the  title  of  the  creditor,  so 
to  speak,  to  be  put  in  the  place  of  the  trustee,  is  a  title  to  get 

2In  re  Johnson,  15  Ch.  D.  548. 

41 


§  40.]  TRUSTEE'S  INDEMNITY.  [CHAP.  vi. 

nothing,  because  nothing  is  due  to  the  trustee."  Whether  the 
right  of  a  creditor  is  so  intensely  derivative  as  this  indicates 
greatly  may  be  doubted,  because,  though  it  be  held  that  the  right 
against  the  trust  estate  is  through  the  right  of  indemnity,  never- 
theless confidence  has  been  reposed  by  the  testator  or  settlor, 
and  not  entirely  by  the  creditor  who  extends  credit,  upon  the 
presumption  of  the  trustee's  fidelity,  the  testator  or  settlor  in- 
viting reliance  thereon.  Furthermore,  it  might  appear  that  at 
the  time  the  trustee  contracted  the  debt  for  the  benefit  of  the 
trust  estate  he  had  an  equity  and,  if  he  afterwards  converts  its 
money,  the  relation  back  of  his  wrongful  act  ought  rather  to 
fall  upon  the  trust  estate  than  upon  the  creditor,  as  the  trust 
estate  and  not  the  creditor  continues  to  rely  upon  the  trustee. 

§  40.  Trustees'  Right  of  Indemnity — Continued. — In  one  of 
the  cases,  decided  by  Lord  Eldon,3  to  which  Jessel,  M.  R.,  refers, 
it  is  said,  in  distinguishing  between  creditors  prior  and  those 
subsequent  to  testator's  death :  "As  to  creditors  subsequent  to 
the  death  of  the  testator,  in  the  first  place  they  may  determine 
whether  they  will  be  creditors.  Next,  it  is  admitted,  they  have 
the  whole  fund  that  is  embarked  in  the  trade  and  in  addition 
they  have  the  personal  responsibility  of  the  individual  with  whom 
they  deal,  the  only  security  in  ordinary  transactions  of  debtor 
and  creditor.  They  have  something  very  like  a  lien  upon  the 
estate  embarked  in  the  trade.  They  have  not  a  lien  upon  any- 
thing else ;  nor  have  creditors  in  other  cases  a  lien  upon  anything 
else ;  nor  have  creditors  in  other  cases  a  lien  upon  the  effects  of 
the  person  with  whom  they  deal;  though,  through  the  equity, 
as  to  the  application  of  the  joint  and  separate  estates  to  the  joint 
and  separate  debts  respectively,  they  work  out  that  lien."  This 
language  about  joint  and  separate  estates  and  joint  and  separate 
debts  was  occasioned  by  a  contest  between  the  creditors  respec- 
tively before  .and  after  testator's  death.  As  to  the  latter,  how- 
ever, it  is  clearly  indicated  that  they  have  a  debt  against  the 
trustee  and  "something  very  like  a  lien"  against  the  trust  estate. 
Of  course,  no  lien  could  exist  against  the  trust  estate,  except 
there  be  a  debt  against  the  trustee.  In  a  later  case  decided  by 

3Ex  parte  Garland  (1804),  10  Vesey  110. 
42 


CHAP,  vi.]  TRUSTEE'S  INDEMNITY.  [§  41. 

Lord  Justice  Turner,  Lord  Justice  Knight  Bruce  concurring,4 
Ex  parte  Garland,  supra,  and  other  cases  therein  cited  were  ap- 
proved, the  opinion  saying:  "They  proceed  upon  the  principle 
that  the  executor  or  trustee  directed  to  carry  on  the  business 
having  the  right  to  resort  for  his  indemnity  to  the  assets  directed 
to  be  employed  in  carrying  it  on,  the  creditors  of  the  trade  are 
entitled  to  the  benefit  of  that  right,  and  thus  become  creditors 
of  the  fund  to  which  the  executor  or  trustee  has  a  right  to 
resort."  Jessel,  M.  R.,  was  merely  contending,  that,  if  the  trustee 
had  no  right  of  indemnity  because  of  his  wrongful  acts,  the 
creditors  would  be  cut  out,  though  there  might  remain  a  fund 
employed  in  the  trade,  and  that  these  cases  did  not  foreclose 
that  contention.  However,  Ex  parte  Garland  says  the  creditors 
have  "something  very  like  a  lien"  on  the  assets  embarked  in  the 
trade,  which  seems  to  mean  a  lien  on  the  whole  of  such  assets, 
resting  on  a  valid  indebtedness  against  the  trustee.  In  other 
words,  the  indebtedness  is  that  of  the  trustee;  its  security  some- 
thing in  the  nature  of  a  lien  on  the  entire  trust  estate. 

§  41.  Trustee's  Right  of  Indemnity,  Where  the  Indebtedness 
is  in  Tort. — In  a  much  more  recent  English  case,5  where  peti- 
tioner had  obtained  a  personal  judgment  against  a  trustee  for 
negligence,  Byrne,  J.  said :  "It  has  been  argued  that  there  is 
no  authority  to  justify  me  in  holding  that,  where  damages  have 
been  recovered  against  a  trustee  in  respect  of  a  tort,  the  person 
so  recovering  can  avail  himself  of  the  trustee's  right  of  indem- 
nity, and  so  go  directly  against  the  trust  estate ;  but  the  author- 
ity of  Bennett  v.  Wyndham,  4  De  Gex,  F.  &  J.  259,  goes  to 
show  that,  if  a  trustee  in  the  course  of  the  ordinary  management 
of  his  testator's  estate,  either  by  himself  or  his  agent,  does  some 
act  whereby  some  third  person  is  injured,  and  that  third  person 
recovers  damages  against  the  trustee  in  an  action  for  tort,  the 
trustee,  if  he  has  acted  with  due  diligence  and  reasonably,  is 
entitled  to  be  indemnified  out  of  his  testator's  estate.  When 
once  a  trustee  is  entitled  to  be  thus  indemnified  out  of  his  trust 
estate,  I  cannot  myself  see  why  the  person  who  has  recovered 

*Ex  parte  Edmunds  (1862),  4  De  Gex.  F.  &  J.  488. 
Bin  re  Raybould  (1900),  1  Ch.  199,  82  L.  T.  N.  S.  46. 

43 


§    42.]  LIABILITY   OF   TRUST   ESTATE —  [CHAP.    VI. 

judgment  against  the  trustee  should  not  have  the  benefit  of  this 
indemnity  and  go  directly  against  the  trust  estate  or  assets,  as 
the  case  may  be,  just  as  an  ordinary  creditor  of  a  business 
carried  on  by  a  trustee  or  executor  has  been  allowed  to  do." 
Further  along,  the  Judge  finding  that  he  was  "not  prepared" 
to  say  the  injury  was  "occasioned"  by  reckless  or  improper 
working  of  the  colliery  (the  trust  estate),  the  petitioner 
was  held  entitled  "to  be  indemnified"  out  of  the  trust  assets. 
This  case  is  better  understood  than  the  statement  by  Jessel,  M. 
R.,  supra,  in  regard  to  the  trustee  pocketing  assets.  The  holding 
is  something  like  discussion  in  regard  to  ultra  vires  acts  com- 
mitted by  a  corporation,  though  apparently  the  right  to  recover 
is  more  confined  than  by  that  doctrine.  At  all  events,  however, 
these  cases  abundantly  show,  as  said  by  Justice  Woods,  supra, 
that  unless  the  trustee  is  bound  no  one  is  bound,  and  it  is  only 
through  his  being  bound,  that  a  trust  estate  may  be  resorted  to. 
American  cases  may  or  not  be  less  strictly  predicated  on  the 
indemnity  idea,  and  of  this  we  shall  presently  see. 

§  42.  Liability  of  Trust  Estate  Through  Indemnity,  as  Shown 
by  American  Cases. — In  the  English  cases  above  referred  to 
there  is  discussed  the  principle  of  liability,  without  reference  to 
any  express  provisions  in  instruments  creating  a  trust  estate  for 
embarkation  in  trade  expressly  declaring  the  liability  of  the 
trusts  for  the  acts  and  contracts  of  trustees,  and  this  course  we 
shall  pursue.  Afterwards  these  instruments  appearing  both  in 
English  and  American  decision  will  be  considered.  In  one  of 
the  Massachusetts  cases,6  a  suit  in  Equity  was  brought  against 
trustees  under  a  will  to  reach  and  have  a  trust  estate  applied  in 
payment  of  their  debts.  By  the  will  testator  devised  his  mills 
and  manufacturing  business  to  three  trustees  with  that  business 
to  be  continued  until  a  younger  son  should  attain  his  majority, 
when  the  trust  estate  was  to  be  conveyed  to  his  two  sons.  The 
trustees  were  empowered  to  provide  for  outstanding  and  current 
liabilities,  and  incur  such  liabilities  on  account  of  the  trust  estate 
as  a  wise  and  prudent  management  might  require.  Provision 
was  made  for  their  compensation,  and  that  they  should  not  be 

SMason  v.  Pomeroy  (1890),  151  Mass.  164,  24  N.  E.  202. 
44 


CHAP.    VI.]  — THROUGH     INDEMNITY.  [§     42. 

liable  for  any  loss  to  the  trust  estate  not  involving  bad  faith  on 
their  part  and  at  the  termination  of  the  trust  and  before  its 
transfer  or  conveyance  they  were  to  be  indemnified  against  any 
then  existing  personal  liability  incurred  in  the  proper  execution 
of  the  trust.  The  elder  of  testator's  sons  was  one  of  the  trustees 
and,  disagreements  arising  in  the  management  of  the  business, 
the  trustees  other  than  the  son  retired.  There  were  two  classes 
of  creditors,  or  at  least  the  retiring  trustees  claimed,  that  those 
becoming  creditors  before  they  retired  should  be  preferred  to 
subsequent  creditors,  even  contending  that  the  latter  had  no  claim 
.against  the  trust  estate  at  all.  In  other  words,  the  claim  was 
advanced  that,  as  the  single  trustee  managing  the  estate  after 
the  retirement  of  the  other  two  had  no  right  of  indemnity,  be- 
cause of  his  wrongful  acts,  these  later  creditors  had  no  right  of 
recovery  out  of  the  assets  of  the  trust.  The  court  states  the 
general  principle  as  follows :  "Where  trustees,  who  are  authorized 
to  carry  on  a  business  contract  debts,  they  are  not  only  liable 
personally  for  the  payment  of  them,  but  the  creditors  may  also 
resort  to  the  trust  fund,  subject,  however,  to  the  rules  of  equity, 
as  applicable  to  the  facts  and  circumstances  which  may  exist  in 
any  particular  case."7 

Inasmuch  as  this  question  was  raised  on  demurrer  and  it 
could  not  be  said  that  creditors  should  be  thus  classified,  unless 
the  evidence  should  show  the  remaining  trustee  had  no  equity, 
a  demurrer  to  the  bill  should  have  been  overruled.  However, 
as  testimony  was  taken  by  a  master,  it  was  said  there  was  no 
finding  that  the  remaining  trustee  was  guilty  of  any  fault  involv- 
ing bad  faith  on  his  part.  The  court  was  careful,  however,  to 
say  that  it  does  not  decide :  "Whether,  as  a  general  rule  of  Equity, 
the  rights  of  the  plaintiffs  would  be  qualified  thereby  in  case 

^Cases  cited:  Ex  psrte  Garland,  10  Ves.  110;  Ex  parte  Richard- 
son, 3  Madd.  79;  Owen  v.  Delamere,  L.  R.  15  Eq.  134;  Cutbush  v. 
Cutbush,  1  Beav.  184;  Thompson  v.  Andrews,  1  Myl.  &  K.  116;  Bur- 
well  v.  Mandeville,  2  How.  560;  Smith  v.  Ayer,  101  U.  S.  320,  330; 
Jones  v.  Walker,  103  U.  S.  444;  Pitkin  v.  Pitkin,  7  Conn.  307;  Lewin 
on  Trusts  (7th  Ed.)  217. 

45 


§     43.]  LIABILITY    OF    TRUST     ESTATE —  [CHAP.     VI. 

it  should  be  found  that  he  (the  remaining  trustee)  was  himself 
subject  to  such  equity." 

§43.  Liability  of  Trust  Estate  Through  Indemnity,  as  Shoivn 
by  American  Cases — Continued. — In  a  North  Dakota  case,8  the 
question  whether  the  trustee's  right  to  indemnity  was  the  in- 
dispensable basis  of  a  claim  by  a  creditor  against  a  trust  estate 
was  not  directly  involved.  The  court,  in  arguing,  said,  how- 
ever: "The  trustee  may  claim  reimbursement  from  the  funds  in 
his  hands  for  any  proper  expenditure  made  by  him  in  the  exe- 
cution of  the  trust;  and  this  equity  is  the  foundation  of  the 
right  of  the  creditor,  under  peculiar  circumstances,  to  proceed 
directly  against  the  property  itself."  To  this  are  cited  several 
cases,  English  and  American,  and  among  the  latter,  Mason  v. 
Pomeroy,  supra,  in  which  case,  as  we  have  seen,  this  principle 
was  not  decided,  but  the  court  appeared  to  doubt  its  correctness, 
if  thereby  was  meant  that  this  equity  is  the  sole  foundation  of 
the  creditor's  right.  By  another  one  of  the  cases  cited,9  this 
principle  does  appear  to  receive  considerable,  if  not  absolute, 
support.  Thus  the  facts  show,  that  a  husband  and  wife  con- 
veyed her  separate  property  to  a  trustee  upon  trust  for  her 
use  during  life  and  a  remainder  in  fee  for  the  use  of  her 
children  living  at  the  time  of  her  death.  The  trustee  was  to 
permit  the  husband  "as  agent  for  said  trustee,  and  as  agent  and 
trustee  for  said  (wife)  and  as  agent  and  trustee  for  her  children 
after  her  death,  to  superintend,  possess,  manage  and  control 
said  property  for  the  benefit  of  all  concerned."  The  concluding 
clause  in  the  deed  is:  "My  intention  is  that  said  (husband)  shall 
be  regarded  for  the  purposes  of  this  deed,  not  merely  as  an 
agent,  but  also  a  co-trustee,"  with  the  other  trustee  to  be  in  no 
manner  responsible  for  his  acts  and  conduct.  Both  husband 
and  wife  having  died,  plaintiffs  sued  in  equity  for  a  balance 
claimed  by  them  to  be  due  by  the  surviving  trustee,  contending 
that  this  was  a  charge  in  equity  upon  the  trust  estate.  The 
court  said  that  the  trustee  other  than  the  husband  was  "a  trustee 

SWells-Stone  Mercantile   Co.  v.   Grover   (1898),  7  N.  D.  460,  75 
N.  W.  914. 

9Hewitt  v.  Phelps  (1881),  105  U.  S.  393. 
46 


(.IIAP.    VI.]  — THROUGH     INDEMNITY.  [§     43. 

merely  of  the  title  without  any  active  duties  in  regard  to  the 
estate,"  and,  therefore,  there  was  ''no  equitable  charge  against 
the  estate  through  the  supposed  liability"  of  him.  It  was  also 
said  it  is  "quite  plain  that  he  was  never  personally  answerable 
for 'the  obligations  created  by"  the  husband,  "and  his  alleged 
assumption  of  the  account  may  be  rejected  as  incompetent  to 
create  any  such  liability  on  his  part."  It  was  said  also  his  ad- 
mission could  create  no  charge  against  the  estate.  The  only 
way,  if  any,  for  the  creditors  to  reach  the  estate  was  through 
their  claim  against  the  husband  as  co-trustee.  Upon  this  the 
court  said :  "Does  his  insolvency  create  an  equity  to  reach  the 
estate,  for  the  benefit  of  which  the  advances  are  admitted  to 
have  been  made?"  This  being  an  appeal  from  a  Circuit  Court 
sitting  in  Mississippi,  the  court  first  expresses  its  concurrence 
of  view  with  Mississippi  cases  hereinbelow  referred  to.  Then 
it  says,  in  speaking  of  the  right  of  the  creditor,  by  way  of  ex- 
ception, to  resort  to  the  trust  estate :  "The  ground  and  reason  of 
this  rule  are,  that  the  trustee  has  an  equity  of  his  own,  for  re- 
imbursement for  all  the  necessary  expenses  to  which  he  has 
been  put  in  the  administration  of  his  trust,  which  he  can  en- 
force by  means  of  the  legal  title  to  the  trust  estate  vested  in 
him;  and  that  his  creditor,  in  case  of  his  insolvency  or  absence 
from  the  jurisdiction,  may  resort  to  the  equity  of  the  trustee, 
upon  a  principle  of  equitable  substitution  or  attachment  for  his 
own  security."  Then  the  court,  premising  that  this  principle 
might  not  apply  at  all  to  indebtedness  created  by  the  husband, 
because  the  legal  title  was  not  vested  in  him,  yet  says  that  even, 
if  it  might  be  extended  to  this  case,  it  ought  to  appear,  but  does 
not,  what  was  the  condition  of  the  account  at  the  husband's 
death.  "For  aught  that  appears,  he  may  have  had  in  his  hands 
means  enough  belonging  to  the  estate  to  satisfy  all  demands 
against  it."  Therefore  it  was  held  that  the  estate  could  not  be 
reached.  This  case  is  very  strong  support  for  what  was  said 
by  Jessel,  M.  R.,10  about  a  creditor's  equity  being  defeated  by 
a  trustee  pocketing  funds  of  the  trust  instead  of  paying  its 
debts.  The  suggestion  above  as  to  distinguishing  to  ascertain 
whether  at  the  time  credit  was  extended  the  trustee  had  an 
re  Johnson  (1880),  15  Ch.  D.  548. 

47 


§   44.]  LIABILITY    OF   TRUST   ESTATE —  [CHAP.    VI. 

equity  or  if  he  deprived  himself  of  it  afterwards,  is  not  referred 
to.  If,  however,  the  creditor  once  acquired  a  right  against  the 
trust  estate,  subsequent  acts  by  the  trustee  ought  not  to  defeat  it. 

§  44.  Liability  of  Trust  Estate  Through  Indemnity  as  Shown 
by  Other  American  Cases. — One  of  the  Mississippi  cases11 
expressly  approved  in  Hewitt  v.  Phelps,  supra,  shows  a  suit  in 
reference  to  the  same  trust  estate,  but  it  was  made  liable,  the 
reason  therefor  being  found  in  the  following  language  from  the 
opinion:  "Generally  the  trustee  alone  must  be  looked  to.  He 
stands  between  the  creditor  and  the  estate.  He  represents  the 
estate  and  deals  for  it.  He  is  entitled  to  be  reimbursed  out  of 
the  trust  estate  for  all  disbursements  rightfully  made  by  him  on 
account  of  it,  and  creditors  must  get  payment  from  him;  but 
when  they  cannot  do  that,  and  it  is  right  for  the  trust  estate 
to  pay  the  demand,  and  it  owes  the  trustee,  or  would  owe  him, 
if  he  had  paid  or  should  pay  the  demand,  the  rule  founded  in 
policy,  which  denies  the  creditor  access  to  the  trust  estate,  yields 
to  the  higher  considerations  of  justice  and  equity;  and  in  order 
that  justice  may  be  done,  the  creditor  may  be  substituted,  as 
to  the  trust  estate,  to  the  exact  position,  which  the  trustee  would 
occupy,  if  he  had  paid  or  should  pay  the  demand,  and  seek  to 
obtain  reimbursement  out  of  the  estate.  Applying  these  prin- 
ciples to  the  facts  of  this  case,  it  will  be  found  that  they  bring 
it  within  the  exception  stated."  The  other  Mississippi  case 
referred  to12  was  a  suit  to  reach  an  estate  through  a  contract 
for  legal  services  rendered  upon  employment  by  an  administra- 
tor. Norton  v.  Phelps,  supra,  declared  that  it  stated  a  well- 
settled  principle.  There  it  was  declared  that:  "If  the  creditor 
can  show  that  the  consideration  of  his  demand  inured  to  the 
benefit  of  the  estate  and  is  unpaid;  that  the  administrator  is 
non-resident  or  insolvent;  has  never  received  credit  for  it  in 
his  settlements,  and  that  the  estate  is  indebted  to  him,  in  such 
case  the  creditor  may,  by  bill  in  chancery,  have  himself  subro- 
gated  to  the  rights  of  the  administrator  against  the  estate,  and 

UNorton  v.  Phelps  (1881),  54  Miss.  467. 
12Qopton  v.   Gholson   (1876),   53  Miss.  466. 
48 


CHAP.    VI.]  —  THROUGH     INDEMNITY.  [§     45. 

to  that  extent  have  satisfaction  of  his  demand  out  of  its  assets." 
Here  it  is  suggested,  that  there  reasonably  might  be  a  distinc- 
tion between  an  administrator,  purely  an  officer  by  statute,  being 
indebted  to  an  estate  and  the  right  of  subrogation  being  value- 
less, and  the  trustee  of  a  trust  embarked  in  trade,  and  subroga- 
tion or  right  of  indemnity  being  equally  confined,  a  cestui  que 
trust  might  be  so  affected  with  notice  of  a  trustee's  misconduct 
as  to  be  estopped  against  claiming  the  trust  estate  should  not 
be  liable,  whether  he  has  any  valuable  right  to  indemnity  or 
not.  In  other  words,  if  his  misconduct  has  by  anticipation  cut 
him  out  of  indemnity,  cestui  que  trust  ought  in  equity  to  be 
considered  under  duty  to  have  him  removed,  or  the  presumption 
exist,  that  creditors  do  have  what  Lord  Eldon  says  is  "some- 
thing very  like  a  lien  upon  the  estate."13  Also,  if  at  the  time 
of  the  extension  of  credit  the  trustee  had  a  right  to  indemnity, 
to  which  the  creditor  might  be  subrogated,  his  subsequent  mis- 
conduct should  not  defeat  subrogation.  It  is  certain  that  by 
the  continuance  of  a  decedent's  interest  in  a  partnership,  a 
will  creating  a  trust  in  the  business,  a  trust  estate  may  be  made 
liable  for  all  the  present  and  future  debts  of  the  partnership.14 

In  the  cases  just  cited  the  controversy  was  whether  the 
general  estate  of  the  testator  or  only  that  part  embarked  in 
business  was  liable  for  such  debts.  The  holding  was  that  the 
latter  was  the  case.  But  in  such  a  case  the  misconduct  of  the 
surviving  partner  acting  as  trustee  could  scarcely  be  interposed, 
even  though  he  was  indebted  to  the  business.  In  other  words, 
the  only  difference  resulting  from  death  of  one  of  the  partners 
was  that  the  joint  and  several  liability  of  partners  was  destroyed, 
the  live  partner  still  remaining  personally  liable.  In  other  re- 
spects the  partnership  would  remain  as  it  formerly  was. 

§  45.    Summary.  —  These  cases  very  strongly  enforce  the  idea 


parte  Garland  (1804),  10  Vesey,  110. 
Hfiurwell  v.   Mandeville   (1844),  43  U.   S.   (2   How.)   560;   Smith 
v.  Ayer    (1879),   101   U.   S.  320;   Jones  v.   Walker   (1880),   103   U.   S. 
444;  Ex  parte  Richardson  (1818),  3  Madd.  79;  Thompson  v.  Andrews 
(1832),  1  Myl.  &  K.  116;  Pitkin  v.  Pitkin  (1829),  7  Conn.  307. 

49 


§  45.]                                 SUMMARY.  [CHAP.  vi. 

that  a  trust  estate  is  not  known  to  the  creditor  at  all,  or,  if 
known,  it  is  only  looked  to  by  way  of  security.  The  trustee  is 
the  debtor  and  unless  his  act  or  contract  entitles  him  to  reim- 
bursement upon  any  claim  therefor  made  against  him,  that  se- 
curity vanishes,  though  the  trustee's  individual  liability  may 
continue. 


50 


CHAPTER  VII. 

LIABILITY  OF  TRUST  ESTATE. 

Directions  Creating  Primary  Liability. 

§  46.  Liability  of  Trust  Estate  Where  Creating  Instrument 
so  Provides. — The  deduction  made  in  the  preceding  chapter,  as 
to  a  continuance  of  a  testator's  interest  in  a  partnership  being 
carried  on  at  the  time  of  his  death  and  its  liability  for  all  its 
debts,  presents  occasion  for  easy  transition  to  considering  the 
status  of  a  trust  estate,  where  the  instrument  of  creation  pre- 
scribes its  liability  for  the  acts  and  contracts  of  its  trustee.  In 
an  early  Pennsylvania  case,15  there  was  a  deed  of  settlement 
and  it  declared  that:  "The  property  and  funds  hereby  granted 
shall  be  subject  to  all  legal  charges  and  expenses  in  carrying 
on  the  business,  and  all  debts  heretofore  contracted  by  Thomas 
in  carrying  on  the  business  shall  be  paid  out  of  the  property 
hereby  conveyed."  The  court  said:  "The  authority  given  the 
trustee  is  very  ample;  so  general  and  comprehensive,  that  when 
applied  to,  and  explained  by  the  usual  mode  of  doing  business 
of  the  kind  entrusted  to  him  in  this  community,  it  must  be  con- 
sidered as  sufficient  power  to  contract  debts.  *  *  *  *  Now 
when  it  is  considered  that  a  great  portion  of  the  goods  and 
effects  was  what  was  commonly  called  a  store  which  required 
to  be  renewed  from  time  to  time,  we  cannot  doubt  but  it  was 
the  intention  of  the  grantor  to  give  the  power  of  contracting 
debts  upon  the  credit  of  the  fund  or  property.  It  would  be 
monstrous  to  hold  that  the  trustee,  altogether  without  prop- 
erty, as  appears  from  the  deed  of  trust,  should  be  allowed  to 
carry  on  business  on  the  strength  of  the  trust  property,  and 
then  to  permit  him  or  anyone  else  to  allege  that  the  trust 
property  was  not  liable,  because  he  was  not  expressly  author- 

iSMatthews  v.  Stephenson  (1847),  6  Pa.  St.   (Barr)  496. 

51 


§    46.]  DIRECTIONS    CREATING    PRIMARY —  [CHAP.    VII. 

ized  to  contract  debts,  in  so  many  words."  This  was  an  action 
at  law  against  the  guardian  of  the  children  cestuis  que  trust 
and  the  question  was,  whether  there  could  be  a  recovery  to  be 
levied  out  of  the  trust  estate.  The  lower  court's  holding  that 
there  could  not  be,  was  reversed.  In  Mason  v.  Pomeroy,16 
considered  in  the  next  preceding  chapter,  the  will  provided 
specifically  for  the  incurring  of  liabilities  on  account  of  the 
trust  estate  and  that  the  trustees  should  not  be  liable  for  any 
loss  to  the  trust  estate.  These  provisions  and  the  fact  that  they 
related  to  a  trust  embarked  in  trade  most  probably  accounts 
for  the  caution  expressed  by  the  Massachusetts  Court  in  refus- 
ing to  say  whether  a  creditor's  right  to  go  upon  the  trust  estate 
depended  upon  the  trustee's  right  to  indemnity.  As  the  court 
found,  as  a  fact,  that  the  trustee  was  not  in  default,  it  was  un- 
necessary to  decide  this  point.  In  a  recent  Pennsylvania  case,17 
an  action  based  on  negligence  was  brought  against  A  and  B 
"trustees,  trading  as  John  Lucas  &  Company".  The  evidence 
showed  a  deed  of  trust  and  the  court  said  that:  "Under  its 
provisions  the  trustees  were  empowered  to  deal  with  the  prop- 
erty as  if  they  were  the  absolute  owners  thereof.  It  is  also 
provided  that  no  responsibility  whatever  shall  result  to  them 
by  reason  of  misconduct  of  agents  or  employees,  also  for  neg- 
ligence there  shall  be  no  liability  or  responsibility  upon  the 
part  of  the  trustees.  It  was  clearly  intended  that  the  risk  of 
any  loss  in  this  respect  should  be  assumed  and  borne  by  the 
trust  estate."  Nothing  further  is  said  in  the  opinion  and  it 
appears  that  the  trustees  were  not  claimed  against  in  their  in- 
dividual capacity  at  all.  The  principle  of  liability  of  the  trust 
estate  is  very  positively  stated,  but  why  or  how  the  plaintiff 
could  proceed  directly  against  it  in  an  action  at  law  is  not 
shown,  nor  is  any  authority  cited.  In  a  North  Carolina  case,18 
a  trustee  was  sued  in  his  official  capacity  in  an  action  for 
damages,  and  the  trust  estate  held  liable.  The  court  explained 
that  this  procedure  could  be  adopted  in  a  court  having  full 

16(1890),  151   Mass.  164,  24  N.   E.  202. 

17prjnz  v.  Lucas  (1905),  210  Pa.  620,  60  Atl.  309. 

!8\Vright  v.  Caney  River  Ry.  Co.   and  Morrow  Trustee   (1909), 
151  N.  C.  529,  66  S.  E.  588,  19  Am.  &  Eng.  Anno.  Cas.  384. 
52 


CHAP.    VII.]  LIABILITY    OF    TRUST    ESTATE.  [§    47. 

jurisdiction  of  legal  and  equitable  issues  and  where  a  part  of 
the  trust  fund  is  in  the  control  and  custody  of  the  court  and 
available  in  satisfaction  of  the  claim.  It  matters  little  whether 
that  is  a  valid  reason  or  not  for  the  point  at  present  involved. 
The  trust  estate  was  held  liable,  specially  because  the  manage- 
ment of  the  trust  estate  was  under  the  supervision  and  control 
of  the  beneficiaries.  In  the  Pennsylvania  case  last  above  cited 
the  trustees  were  held  rightly  proceeded  against  in  their  of- 
ficial capacity  because  the  trust  estate  was  under  their  absolute 
control  and  "it  was  clearly  intended  that  the  risk  of  any  loss" 
was  to  be  "borne  by  the  trust  estate."  But  it  was  said  in  the 
Wright  case:  "It  is  true,  as  a  general  rule,  that  a  trust  fund 
cannot  be  subjected  to  legal  liability  by  reason  of  the  torts  of 
the  trustee  or  his  agents  and  employees,  but  this  doctrine  ordi- 
narily exists  in  the  case  of  passive  trusts,  or  when  active,  in 
those  instances  where  the  power  and  duties  of  the  trustee  are 
so  defined  and  restricted  by  the  law  or  the  provisions  of  the 
instrument  under  which  he  acts,  that  the  principle  of  imputed 
responsibility  .similar  to  that  which  lobtains  in  the  fcase  of 
principal  and  agent  cannot  prevail."  There  is  more  or  less  of 
unsatisfactory  statement  in  this  quotation,  but  it  at  least  an- 
nounces clearly,  that  in  an  active  trust  there  is  liability  for  the 
acts  of  the  trustee  unless  restrictions  by  law  or  the  creating 
instrument  this  is  not  so.  This  rule  takes  no  account  of  a 
creditor's  remedy  through  a  trustee's  right  to  indemnity,  but 
through  imputability,  as  in  the  relation  of  principal  and  agent, 
that  is  to  say  imputability  so  far  as  the  trust  estate  is  con- 
cerned. But  imputability  so  far  as  cestui  que  trust  is  con- 
cerned is  another  question. 

§  47.  Liability  of  Trust  Estate  Where  Creating  Instrument 
so  Provides — Continued. — In  a  Massachusetts  case,19  an  agree- 
ment provided  for  non-liability  of  shareholders  in  an  unincor- 
porated association  to  third  parties  for  the  acts  and  contracts 
of  trustees,  that  all  contracts  by  them  should  specifically 
provide  against  any  personal  liability  on  their  part  and  that 
only  the  property  of  the  trust  estate  should  be  answerable. 

l»Hussey  v.  Arnold  (1904),  185  Mass.  202,  70  N.  E.  87. 

53 


§    47.]  DIRECTIONS    CREATING    PRIMARY [CHAP.    VII. 

The  agreement  did  not  specifically  say  that  only  the  property 
of  the  trust  estate  was  to  be  answerable,  but  it  was  said  by 
the  opinion,  that  the  trustees  could  provide  against  such  li- 
ability "in  accordance  with  the  direction  of  the  agreement." 
This  case  and  the  one  it  cites  will  be  referred  to  hereafter  in 
reference  to  the  general  right  of  a  trustee  to  limit  his  personal 
liability,  and  the  effect  of  such  a  limitation  as  giving  the  right 
to  proceed  directly  against  the  trust  'estate.  In  a  Federal 
Court  case20  by  Putnam,  C.  J.,  affirmed  by  Circuit  Court  of 
Appeals,  an  agreement  creating  a  trust,  the  shareholders  in  a 
joint-stock  association  being  the  cestuis  que  trust,  did  provide 
that  any  money  borrowed  by  the  trustees  for  taxes  and  the 
necessary  expenses  of  the  trust  "shall  be  and  remain,  until  paid, 
a  lien  upon  all  funds  and  moneys  belonging  to  this  trust  or 
thereafter  in  the  hands  of  the  trustees,  in  preference  to  any 
claim  of  any  shareholders  as  such  upon  such  funds  and  moneys." 
It  also  provided  against  shareholders  being  bound  personally; 
for  the  trustees  in  all  contracts  making  reference  to  the  declara- 
tion and  that  all  persons  and  firms  or  corporations  contracting 
with  the  trustees  shall  "look  only  to  the  funds  and  property  of 
the  trust  for  payment."  This  case  was  a  suit  upon  a  note  given 
by  the  surviving  trustee  saying  that  "the  trustee  of  the  Topeka 
Land  and  Development  Company,  as  such  trustee  under  declara- 
tion of  trust  dated  May  23rd,  1887,  and  not  otherwise,  promise 
to  pay"  etc.  The  court  said:  "It  was  the  duty  of  the  plaintiff 
to  ascertain  for  itself  what  powers  the  trustees  had  in  the 
premises.  *  *  *  Whether  or  not  the  plaintiff  examined  the 
articles  of  association,  or  knew  their  contents,  is  of  no  conse- 
quence, because  this  express  provision  (in  the  note)  required 
it  to  do  so,  or  take  the  hazard  of  not  doing  it."  The  court  then 
goes  on  to  inquire  whether  a  provision  limiting  the  creditor's 
remedy  to  the  general  assets  of  the  trust  is  contrary  to  the 
rules  of  law  and  holds  it  is  not,  because  "the  entire  property 
of  the  association  was  held  in  trust,"  a  court  of  chancery  being 
bound  to  "apply  it  equitably  and  proportionally  to  the  discharge 
of  obligations  incurred  by  the  trustee."  In  other  words  a 

20Bank  of  Topeka  v.  Eaton   (1900),  100  Fed.  8;   s.   c.   107  Fed. 
1003,  47  C.  C.  A.  140. 
54 


CHAP.    VII.]  — LIABILITY    OF    TRUST    ESTATE.  [§    48. 

trust  estate,  unlike  a  legal  estate,  is  subject  to  no  dissipation 
at  the  expense  of  general  creditors  by  way  of  preferences  to 
particular  creditors,  and,  if  the  only  interest  of  a  cestui  que 
trust  therein  is  represented  by  a  share  of  stock,  no  homestead 
or  exemption  laws  may  interfere  with  equitable  distribution 
among  creditors. 

§  48.  Embarking  Trust  in  Trade  as  Pledging  it  for  Debt. — 
There  are  cases  which  seem  to  proceed  on  the  theory  that  em- 
barking a  trust  in  trade  amounts  to  a  specific  statement  that 
it  is  primarily  liable  for  the  contracts  and  acts  of  its  trustee. 
Thus  in  a  Pennsylvania  case,21  the  facts  show  that  testator 
devised  all  his  property  to  his  brother  in  trust  to  possess,  hold 
and  manage  it  as  a  business  for  the  benefit  of  certain  cestuis  que 
trust.  The  trust  estate,  as  well  as  the  trustee,  became  insolvent. 
The  character  and  nature  of  the  different  kinds  of  business  car- 
ried on  by  testator  required  large  credits.  The  court  said : 
"These  credits  were  obtained  by  the  trustee  in  conducting  the 
same,  and  the  creditors  upon  the  faith  of  the  trust  estate  gave 
them.  *  *  *  While  the  wife  and  the  others  are  named  in  the 
will  as  cestuis  que  trust,  there  came  into  existence,  by  reason  of 
the  power  of  the  trustee,  the  estate  embarked  in  trade,  the 
credit  given  the  trust  estate  in  the  business,  a  class  of  per- 
sons whom  equity,  in  case  of  insolvency,  will  protect  by  the 
preservation  of  the  trust  property  from  destruction  or  dissipa- 
tion. This  equity  has  its  foundation  in  the  estate  which  is 
embarked  in  trade  and  to  which  credit  has  been  given.  Trust 
property  which  has  been  embarked  in  business  is  primarily 
liable  to  creditors  for  debt,  and  will  be  applied  as  far  as  it 
will  go  to  the  liabilities.  (Hill  on  Trustees,  4th  Ed.  *  443.)" 
Further  along,  as  to  this  estate,  the  court  said:  "As  it  is  in- 
solvent, and  the  trustee,  as  the  master  finds,  is  also  insolvent, 
he  became  a  trustee  for  creditors.  As  such  he  was  bound  to 
protect  all  their  rights  and  preserve  the  trust  estate  for  dis- 
tribution among  them  according  to  their  respective  rights,  and 
he  had  no  right  to  give  a  preference  to  any  of  them."  There- 

21Woddrop  v.  Weed  (1893),  154  Pa.  St.  307,  26  Atl.  375,  35  Am. 
St.  Rep.  832. 

55 


§    48.]  EMBARKING    TRUST    IN    TRADE —  [CHAP.    VII. 

fore,  the  court  in  this  case  held  that  the  creditor's  claim  for 
an  account  with  the  trust  property  to  be  divided  ratably  among 
all  the  creditors  was  sustainable,  and  certain  promissory  notes, 
with  warrants  of  attorney  to  confess  judgment,  acquired  no 
priority.  This  decision  elevates  the  general  credit  of  a  trust 
estate  over  that  of  a  corporation  or  individual,  with  its  or  his 
right  to  prefer  one  creditor  over  another.  Here,  too,  we  dis- 
cover that  the  trustee's  own  misconduct  or  the  existence  or 
non-existence  in  him  of  a  right  to  indemnity,  was  not  suggested, 
but  where  the  estate  is  embarked  in  trade  it  "is  primarily  liable 
to  creditors,"  and  creditors  become  preferred  cestuis  que  trust. 
The  opinion  also  quotes  from  Lord  Eldon  that  the  creditors 
"have  something  very  like  a  lien  upon  the  estate  embarked  in 
trade."22 

In  a  Texas  case,23  the  contention  of  non-liability  of  a  trustee, 
in  his  personal  capacity,  appears  to  have  been  based  mainly  upon 
the  fact,  that  the  trust  was  embarked  in  trade.  The  court  said: 
"Although  the  plaintiffs  knew  that  the  defendant  was  conduct- 
ing the  mercantile  business  of  which  he  had  control  and  manage- 
ment as  trustee  for  the  benefit  of  the  persons  mentioned  in  the 
conveyance  and  charged  the  goods  when  sold  to  (the  trust 
estate)  the  defendant  was  nevertheless  personally  liable  to  the 
plaintiffs  for  the  price  of  the  goods."  The  court  also  adopted 
the  text  from  Hill  on  Trustees,  *533,  that  so  far  as  this  per- 
sonal liability  is  concerned:  "It  is  immaterial  that  the  trade 
is  carried  on  by  him  in  consequence  of  express  direction  in  the 
trust  instrument;  although  the  trust  property  will  doubtless 
be  primarily  liable  to  the  creditors  and,  will  be  first  applied 
so  far  as  it  will  go  in  discharge  of  the  liabilities."  This  theory 
of  primary  liability  seems,  however,  not  to  operate  in  the  way 
of  postponing  right  of  recovery  against  the  trustee  in  the  first 
instance,  because,  possibly,  as  he  has  control  of  the  trust  estate 
he  should  be  able  to  take  from  its  funds  to  discharge  his  per- 

22£x  parte  Garland  (1804),  10  Vesey,  110. 

23Connally  v.  Lyons   (1891),  82  Tex.  664,  18  S.  W.  799,  21  Am. 
St.  Rep.  935. 
56 


CHAP.   VII.]  AS  PLEDGING  IT   FOR  DEBT.  [§   49. 

sonal  obligation  incurred  for  the  benefit  of  the  trust  and  this 
is  all  that  a  court  could  do  for  him. 

§  49.  Special  Contract  Relieving  Trustee  From  Personal 
Liability. — The  right  of  a  trustee  to  relieve  himself  from  per- 
sonal liability  in  his  contracts  as  such  has  been  ruled  to  be  an 
independent  right.  In  other  words,  if  he  stipulates  clearly 
and  unambiguously  for  his  release  from  personal  liability  when 
acting  in  a  representative  capacity,  it  has  been  ruled,  that  his 
stipulation  is  valid,  whether  or  not  the  trust  estate  is  bound 
by  the  contract.  Thus  in  a  Massachusetts  case,24  an  action 
at  law  was  brought  against  the  makers  individually  upon  a 
note,  on  the  face  of  which  it  was  stated  that  "we  as  trustees 
but  not  individually  promise",  etc.  The  note  was  signed  by 
the  makers  with  the  words  "Trustees"  following  thereafter.  It 
did  not  appear  from  the  note  for  whom  or  for  what  they  were 
trustees  and  it  was  contended  that  the  word  "trustees"  was  "a 
mere  description  of  the  general  relation  or  office  which  the  per- 
sons signing  the  paper  hold  to  another  person  or  to  a  cor- 
poration." This  contention  was  held  not  sustained,  because, 
said  the  court,  this  "would  require  us  to  strike  out  the  words 
'but  not  individually',  although  in  so  doing"  we  should  not  only 
alter  the  contract,  but  should  impose  upon  them  a  liability 
which  apparently  they  took  special  pains  to  avoid."  Then  as 
showing  the  absolute  right  of  the  trustees  to  stipulate,  the  court 
further  said:  "It  is  contended  that  if  these  defendants  are 
not  liable  upon  the  contract  as  a  note,  then  nobody  is  liable. 
Even  if  such  were  the  fact,  it  would  not  be  in  the  power  of  the 
court  to  alter  the  contract  for  the  purpose  of  giving  it  validity." 
The  court  also  announced  the  general  principle  that:  "If  a 
party  in  a  contract  into  which  he  voluntarily  enters,  and  not 
in  the  execution  of  any  official  trust  or  duty,  makes  it  an  ex- 
press stipulation  that  he  is  acting  for  somebody  else,  and  is  in 
no  event  to  be  personally  liable,  he  certainly  cannot  be  ren- 
dered so  at  law."  This  case  was  later  approved  by  the  same 

24Shoe  &  Leather  Nat'l.  Bank  v.  Dix  (1877),  123  Mass.  148.     See 
also  Glenn  v.  Allison  (1882),  58  Md.  527. 

57 


§   49.]  LIABILITY   OF  TRUST   ESTATE —  [CHAP.    VII. 

court25  in  a  case  where  the  agreement  creating  the  trust  di- 
rected that  trustees  should  in  all  contracts  stipulate  that  they 
were  not  to  be  personally  liable.  In  another  case,26  the  reason 
for  the  validity  of  such  a  stipulation  is  based  upon  the  fact 
that  thereby  the  creditor  could  apply  directly  to  a  Court  of 
Equity  "as  contemplated  by  the  express  direction  of  the  articles 
of  association  that  the  debtors  of  the  trust  should  look  for  pay- 
ment solely  to  its  property."  This  last  case,  perhaps,  may  be 
said  still  to  leave  the  question  open  as  to  whether  such  way 
would  be  open  in  the  absence  of  such  contemplation  in  an  in- 
strument creating  the  trust.  On  this  subject  the  next  follow- 
ing case  from  New  York27  is  pertinent.  In  this  case  there 
was  no  trust  embarked  in  trade,  but  real  estate  had  been  con- 
veyed to  the  trustee  upon  trust  to  receive  the  rents  and  pay  over 
the  net  income  to  the  life  tenant  with  remainder  over.  The 
trustee  having  no  funds  in  hand  and  repairs  being  needed,  they 
were  made  upon  the  credit  of  the  estate.  The  court  said :  "The 
general  rule  undoubtedly  is,  that  a  trustee  cannot  charge  the 
trust  estate  by  his  executory  contracts  unless  authorized  to 
do  so  by  the  terms  of  the  instrument  creating  the  trust.  Upon 
such  contracts  he  is  personally  liable  and  the  remedy  is  against 
him  personally.  But  there  are  exceptions  to  this  general  rule. 
When  a  trustee  is  authorized  to  make  an  expenditure,  and  he 
has  no  trust  funds  and  the  expenditure  is  necessary  for  the  pro- 
tection, reparation  or  safety,  of  the  trust  estate,  and  he  is  not 
willing  to  make  himself  personally  liable,  he  may,  by  express 
agreement,  make  the  expenditure  a  charge  upon  the  trust  estate. 
In  such  a  case  he  could  himself  advance  the  money  to  make  the 
expenditure,  and  he  would  have  a  lien  upon  the  trust  estate, 
and  he  can  by  express  contract  transfer  this  lien  to  any  other 
party,  who  may  upon  the  faith  of  the  trust  estate,  make  the  ex- 
penditure." This  ruling  was  based  on  an  older  case,28  which 
held  that  for  the  necessary  protection  of  the  trust  estate  "there 
is  no  rule  of  law  or  equity  which  would  prevent  the  trustee  as- 

25Hussey  v.  Arnold  (1904),  185  Mass.  202,  70  N.   E.  87. 

26fiank  of  Topeka  v.  Eaton  (1900),  100  Fed.  8. 

27New  v.  Nicoll  (1878),  73  N.  Y.  127,  29  Am.  Rep.  111. 

28Noyes  v.  Blakeman  (1852),  6  N.  Y.  567. 
58 


CHAP.    VII.]  — THROUGH    STIPULATION.  [§    49. 

signing  his  own  lien."  "Shall",  the  court  said,  "the  trustee  stand 
by  quietly  and  see  the  objects  of  the  trust  utterly  frustrated? 
Rather  than  suffer  it,  the  law  will  infuse  into  the  trust  deed 
a  provision  to  enable  the  trustee  to  exercise  the  necessary  power, 
if  possible,  to  prevent  it."  In  other  words,  even  as  to  trusts 
not  embarked  in  trade,  or  where  the  creating  instrument  does  not 
specifically  state,  the  trust  estate  may  not  be  directly  liable  for  debts 
created  in  its  management,  yet  they  may  be  made  so  by  the  law 
"infusing"  into  that  instrument  the  necessary  power  for  them 
to  become  thus  liable.  These  two  cases,  it  is  perceived,  plainly 
recognize  that  a  trust  estate  can  be  charged  by  the  trustee  when 
"by  the  terms  of  the  instrument  creating  the  trust"  this  is  pro- 
vided, and  they  rule  that,  even  when  it  does  not  so  provide, 
if  an  expenditure  is  necessary  for  the  preservation  of  the  trust 
estate,  a  trustee,  unable  or  unwilling  to  become  personally  liable 
or  to  advance  the  necessary  funds,  may  transfer  his  lien  to  an- 
other. Generally,  too,  it  may  be  said  that  in  the  absence  of  a 
reservation  against  personal  liability,  the  trustee  becomes  per- 
sonally liable,  even  if  the  trust  deed  provides  he  shall  be  free 
from  personal  liability.  Thus  as  said  by  Holmes,  J.,  in  speak- 
ing as  to  a  particular  case:29  "It  was  also  true,  of  course,  that 
the  fact  that  the  trust  deed  provided  that  the  defendants  (trus- 
tees) should  be  free  from  personal  liability,  i.  e.,  under  the 
deed,  did  not  limit  their  authority  to  contract  personally  with 
the  plaintiff,  if  they  saw  fit."  In  an  Illinois  case,30  it  was 
sought  to  proceed  directly  against  a  trust  estate,  where  a  former 
trustee  had  engaged  the  services  of  plaintiff,  a  broker,  to  ob- 
tain a  loan.  Before  negotiations  could  be  concluded  the  trustee 
died  and  his  successor  obtained  the  loan  from  another.  It  was 
held  that  the  trustee  was  personally  liable  and  this  liability  sur- 
vived his  death.  However,  the  broker's  compensation,  it  was 
said,  could  have  been  made  by  the  trustee  a  specific  lien  on 
the  trust  fund  had  the  contract  between  the  broker  and  the 
trustee  so  specified,  as  the  services  were  beneficial  to  the  estate. 

29American    Mining    &    Smelting    Co.    v.    Converse    (1900),    175 
Mass.  449,  56  N.  E.  594. 

30J0hnson  v.  Leman   (1890),   131  111.   609,  23  N.  E.  435,   7  L.  R. 
A.  656,  19  Am.  St.  Rep.  63. 

59 


§  50.]  SUMMARY.  [CHAP.  vn. 

In  a  Rhode  Island  case,31  trustees  sought  to  escape  personal 
liability  on  a  note  endorsed  by  them  as  trustees.  They  claimed 
that  the  trust  being  one  embarked  in  business  and  the  note  be- 
ing indorsed  by  direction  of  the  will  and  this  being  known  to 
the  holder,  this  constituted  a  mere  pledging  of  the  trust  estate. 
The  court,  however,  held  that  a  trustee  is  held  personally  liable 
upon  his  contracts  as  trustee  because  he  has  no  principal,  or, 
rather,  he  is  the  principal  himself.  "Therefore  it  was  not 
thought  that  the  fact  that  the  defendant  trustees  were  em- 
powered by  the  will,  and  it  was  made  their  duty  to  indorse  the 
notes  in  suit,  is  sufficient  to  relieve  them  from  liability  upon  their 
indorsements,  they  not  having  stipulated  that  they  were  not  to 
be  so  liable."^ 

§  50.  Summary. — The  array  of  authority  and  excerpts  there- 
from shown  in  this  and  the  next  preceding  chapter  abundantly 
sustain  the  proposition  that  a  trust  estate  may  be  made  liable, 
where  a  debt  has  been  incurred  for  its  benefit.  However,  it 
also  appears  that  the  trustee  is  liable  in  the  first  instance,  where 
he  does  not  otherwise  stipulate.  Liability,  however,  would  seem 
always  to  depend  upon  the  debt  being  one  contracted  by  the 
trustee  by  virtue  of  his  powers  as  such,  or  upon  an  act  reason- 
ably in  the  administration  of  the  estate  confided  to  his  manage- 
ment. 


31Roger  Williams  et  al.  Bk.  v.  Groton  Mnfg.  Co.   (1889),  16  R. 
I.  504,  17  Atl.  170. 

32See  also   Mitchell   &   Co.  v.  Whitlock   (1897),   121   N.   C.   166, 
28  S.  E.  292. 
60 


CHAPTER  VIII. 

CESTUIS  QUE  TRUST  OF  A  TRADING  TRUST. 
English  Decisions. 

§  51.  Unincorporated  Associations. — The  fact,  that  various 
business  enterprises  have  been  attempted  to  be  carried  on  by 
joint-stock  and  other  unincorporated  associations  leads  to  an  in- 
quiry into  the  relations  of  members  inter  sese  and  to  the  con- 
tracts and  acts  of  the  business  carried  on  by  such  associations. 
In  England  these  associations  came  into  disfavor  to  such  an 
extent  that  what  is  known  as  "The  Bubble  Act"  was  enacted 
in  the  early  part  of  the  Eighteenth  Century  for  their  suppres- 
sion. It  was,  however,  the  form,  which  the  agreements  or  ar- 
ticles for  these  associations  took,  more  than  the  fact  of  their 
tormation,  which  called  down  upon  them  the  law's  denounce- 
ment. Afterwards,  legislation  in  regard  to  partnerships,  called 
"Companies  Acts"  prescribed  certain  regulations  where  mem- 
bers in  a  partnership  exceeded  a  designated  number.  The  form, 
to  which  allusion  is  above  made,  was  the  providing  for  mem- 
bership in  and  by  the  ownership  of  transferable  shares.  It  was 
by  the  issuance  of  such  shares,  that  wild  schemes  were  ex- 
ploited, along  with  representation,  that  there  was  no  personal 
liability  attaching  to  their  ownership.  Furthermore,  actions 
either  at  law  or  in  equity  were  difficult  to  bring  or  be  brought, 
by  reason  of  an  infinite  number  of  necessary  parties  thereto. 

§  52.  English  Decisions  as  to  Associations  With  Transferable 
Shares. — The  purport  and  bearing  of  the  "Bubble  Act"  was 
treated  nearly  a  hundred  years  after  its  passage,  and,  in  con- 
sidering whether  or  not  an  association  with  transferable  shares 
was  condemned,  Lord  Ellenborough,  C.  J.,  said:1  "Independent 
of  the  general  tendency  of  schemes  of  the  nature  of  the  project 
iKing  v.  Dodd  (1808),  9  East  516. 

61 


§   52. J  UNINCORPORATED  ASSOCIATIONS.  [CHAP.   VIII. 

now  before  us  to  occasion  prejudice  to  the  public,  there  is  be- 
sides in  this  prospectus  a  prominent  feature  of  mischief;  for  it 
therein  appears  to  be  held  out  that  no  person  is  to  be  account- 
able beyond  the  amount  of  the  share  for  which  he  shall  sub- 
scribe, the  conditions  of  which  are  to  be  included  in  a  deed  of 
trust  to  be  enrolled.  But  this  is  a  mischievous  delusion  cal- 
culated to  ensnare  the  unwary  public.  As  to  the  subscribers 
themselves,  indeed,  they  may  stipulate  with  each  other  for 
this  contracted  responsibility;  but  as  to  the  rest  of  the  world 
it  is  clear,  that  each  partner  is  liable  to  the  whole  amount  of 
the  debts  contracted  by  the  partnership."  It  is  seen,  that  the 
opinion  was  not  that  the  issuance  of  transferable  shares  was  il- 
legal or  objectionable,  but  the  representation  that  there  was  no 
relation  of  partnership,  with  liability  attaching  thereto,  which 
gave  to  the  project  a  fraudulent  aspect.  Three  years  later  the 
Lord  Chief  Justice  considered  more  fully  the  effect  of  the 
"Bubble  Act"  upon  associations  with  transferable  shares.2 
There  was  a  prosecution  under  indictment  against  one  Webb 
and  others  for  the  formation  of  such  an  association.  The  Lord 
Chief  Justice  in  rendering  judgment  for  defendants,  said  among 
other  things:  "The  enacting  part  in  Section  19  relates  to  all 
such  unlawful  undertakings  and  attempts  so  tending  to  the  com- 
mon grievance,  etc.,  and  the  making  or  taking  of  any  subscrip- 
tions for  that  purpose,  etc.  It  is  only,  therefore,  where  the  sub- 
scription is  with  reference  to  undertakings,  etc.,  which  the  act 
prohibits,  that  it  is  illegal.  The  act  does  not  apply  indiscrimi- 
nately to  all  subscriptions.  The  purpose  for  which  this  capital 
was  raised,  viz :  The  buying  of  corn,  etc.,  not  manifestly  tend- 
ing to  the  common  grievance,  and  being  in  this  case  expressly 
found  to  have  been  beneficial,  the  only  remaining  question  is  this, 
whether,  as  the  shares  in  this  institution  are,  to  the  extent  which 
has  been  pointed  out,  transferable,  the  defendants  have  offended 
against  this  act  in  respect  of  having  raised  such  a  description 
of  transferable  stock.  It  may  admit  of  doubt,  whether  the  mere 
raising  transferable  stock  is  in  any  case,  per  se,  an  offense  against 
the  act,  unless  it  has  relation  to  some  undertaking  or  project 
which  has  a  tendency  to  the  common  grievance,  prejudice  or 

2King  v.  Webb  (1811),  14  East  506. 
62 


CHAP.    VIII.]  ENGLISH    DECISIONS.  [§     53. 

inconvenience  of  his  Majesty's  subjects  or  of  great  numbers  of 
them."  Then  his  Lordship  holds  that  at  least  shares  of  limited 
transferability  such  as  were  provided  for  by  this  company  did 
not  come  under  the  act. 

§  53.  English  Decisions  as  to  Associations  With  Transferable 
Shares — Continued. — Lord  Eldon  thought,  or  appeared  to  think, 
that  joint-stock  associations  were  illegal  at  common  law,  because 
they  could  not  "effectually  demand  what  they  had  a  right  to 
demand  or  be  effectually  sued  for  that  for  which  they  were 
liable,"  all  of  this  because  of  the  partners  being  so  numerous 
courts  practically  could  not  attend  to  all  the  necessary  parties 
in  a  suit.3  But  Lord  Brougham  in  1832  expressly  denied  this 
proposition,4  saying:  "To  hold  such  a  company  illegal  would  be 
to  say  that  every  stock  company  not  incorporated  by  charter  or 
act  of  parliament  is  unlawful,  and,  indeed,  indictable  as  a  nui- 
sance, and  to  decide  this  for  the  first  time,  no  authority  of 
a  decided  case  being  produced  for  such  a  doctrine.  The  clause 
intimating  that  each  subscriber  is  only  to  be  liable  to  the  extent 
of  his  share  is  not  enough  to  make  the  association  illegal;  such 
a  regulation  is  wholly  nugatory,  indeed,  and  can  serve  no  pur- 
pose whatever,  unless  to  give  notice.  *  *  *  *  For  the  pur- 
pose of  restricting  the  liability  of  the  shareholders,  it  would 
plainly  be  of  no  avail ;  and  whoever  became  a  subscriber  upon 
the  faith  of  the  restricting  clause,  or  of  the  limited  responsibility, 
which  that  holds  out,  would  have  himself  to  blame  and  be  the 
victim  of  his  ignorance  of  the  known  law  of  the  land."  This 
case  was  followed  in  1843  by  a  decision  by  Tindal,  Lord  Chief 
Justice,5  in  which  he  said :  "The  raising  and  transferring  of 
stock  in  a  company  cannot  be  held,  in  itself,  an  offense  at  com- 
mon law ;  such  species  of  property  was  altogether  unknown  to 
the  law  in  ancient  times;  nor  indeed  was  it  in  usage  and  prac- 
tice until  a  short  period  antecedent  to  the  passing  of  the  Statute 
("Bubble  Act"),  as  is  evident  from  the  preamble  to  the  18th 
section  which  recites  that  it  is  notorious  that  these  projects  and 

3Van  Sandan  v.  Moore  (1826),  1  Russ.  Ch.  441. 
4Walburn  v.  Ingilby  (1832),  1  Mylne  &  K.  61,  76. 
5Garrard  v.  Hardey,  5  Manning  &  Granger,  251. 

63 


§    54.]  SUMMARY  OF  ENGLISH   CASES.  [CHAP.   VIII. 

undertakings,  which  it  is  the  object  of  the  clause  to  put  down, 
had  been  contrived  and  practiced  within  the  Kingdom  since 
the  24th  of  June,  1718,  evidently  showing  that  the  act  was  look- 
ing to  some  grievance  of  late  introduction.  And  as  that  clause 
has  been  repealed,  we  find  no  authority  for  holding  that  an 
allegation  that  the  parties  raised  and  transferred  stock  is  simply 
and  per  se,  without  any  statement  of  the  mode  by  which  it  in- 
jures and  defrauds  the  public,  an  indictable  offense  at  common 
law." 

In  1859  Romilly,*M.  R.,  said:6  "I  have  listened  in  vain  for 
any  case,  or  indeed  for  the  statement  of  any  principle,  whereby 
at  common  law  and  independent  of  any  statute,  a  partnership 
between  persons  who  agree  among  themselves  that  their  shares 
shall  be  legally  assignable,  is  absolutely  void  or  illegal.  I  find 
no  case  which  determines  it,  and  no  principle  on  which  it  can 
rest,  nor  am  I  able  to  conjecture  why  such  an  association  should 
be  void  at  common  law.  It  does  not  appear  to  me  to  offend 
against  society,  or  to  injure  any  class  of  individuals,  and,  there- 
fore, unless  bound  by  distinct  authority,  I  should  not  be  the 
first  judge  to  hold  that  such  an  association  was  void  at  common 
law." 

§  54.  Summary  of  Above  Cases. — These  cases  indicate  merely 
a  prejudice  against  transferable  shares  of  stock  in  an  unincor- 
porated association,  as  a  kind  of  aftermath  of  the  calamity  that 
succeeded  their  employment  in  such  schemes  as  "The  Bubble 
Act"  was  enacted  to  suppress.  Investment  in  these  shares  was 
the  avenue  of  approach  to  thousands  willing  to  gamble  upon  the 
delusive  promises  of  wealth  in  extravagant  prospectuses  scat- 
tered broadcast  over  England.  But  the  extent  only  to  which 
English  decision  went  in  regard  to  the  issuance  of  such  shares 
seems  to  be,  that  they  could  be  regarded  as  a  means  to  a  fraudu- 
lent end,  but  in  a  beneficial,  lawful  enterprise  they  could  be  law- 
fully provided  for.  It  is  also  to  be  observed,  that  the  liability 
of  shareholders  as  partners  was  only  considered  as  to  under- 
takings carried  on  by  an  unincorporated  joint-stock  association 

6Re  Mexican  &  So.  Am.  Co.,  27  Beav.  474,  4  De  G.  &  J.  320. 
64 


CHAP.    VIII.]          TRUSTS    WITH    TRANSFERABLE    SHARES.  [§     55. 

as  such.  There  was  not  yet  evolved  the  idea  of  such  an  associa- 
tion forming  the  nucleus  for  investment  in  shares  in  an  enter- 
prise, the  title  in  and  control  over  the  property  of  which  was 
to  be  in  trustees.  This  development  appears  in  English  cases 
next  herein  to  be  considered. 

§  55.  Transferable  Shares  in  a  Trading  Trust. — To  show  how 
pointedly  different  in  England  was  the  old  idea  in  an  associa- 
tion, a  mere  partnership,  with  interests  therein  measured  by 
transferable  shares,  carrying  on  a  business  through  a  board  of 
directors,  and  a  similar  association  causing  title  to  property 
embarked  in  trade  to  be  vested  in  trustees,  who  were  to  man- 
age and  control  it  according  to  their  own  discretion,  a  some- 
what extended  consideration  should  be  given  to  a  notable  case 
decided  in  1880.7  The  English  Companies  Act  of  1862  pro- 
vided that  any  association  consisting  of  more  than  twenty  per- 
sons, formed  for  the  purpose  of  carrying  on  business,  that  had 
for  its  object  the  acquisition  of  gain  by  the  association,  or  by 
the  individual  members  thereof,  should,  to  be  legal,  be  registered 
as  a  company  under  said  Act.  A  shareholder  in  a  Submarine 
Cables'  Trust  sued  to  have  it  wound  up  as  being  illegal  for 
want  of  such  registration.  Sir  George  Jessel,  M.  R.,  rendered 
judgment  specifically  declaring  that  it  was  an  association  of 
more  than  twenty  persons  formed  for  such  a  purpose  "without 
being  registered  as  a  company  under  said  act,"  and  he  "ordered 
that  the  affairs  of  the  association  should  be  wound  up."  This 
judgment  was  reversed  on  appeal,  with  directions  that  the  ac- 
tion be  dismissed,  Lords  Justices  James,  Brett  and  Colton  of 
the  Court  of  Appeals  all  concurring  in  separate  opinions.  The 
association  or  trust  was  constituted  by  a  deed  between  six  per- 
sons, called  in  the  opinions  trustees  of  the  one  part,  and  a  seventh 
person,  called  in  said  opinions  the  covenantee,  "for  and  on  be- 
half of  all  the  holders  for  the  time  being,  of  the  certificates  here- 
inafter mentioned,"  of  the  other  part.  This  deed  recited  that 
various  persons  had  subscribed  in  or  for  the  purchase  by  said 
trustees  of  the  stock,  shares  and  debentures  of  certain  submarine 
telegraph  companies  as  set  forth  in  an  attached  schedule,  all 

TSmith  v.  Anderson,   15   Ch.   Div.  247-285. 

65 


§    55.]          TRUSTS    WITH    TRANSFERABLE    SHARES.  [CHAP.    VIII. 

of  which  had  been  transferred  to  said  trustees  on  the  books  of 
said  companies,  and  it  was  designed  to  issue  to  said  subscribers 
certificates  of  shares  according  to  their  subscriptions  respectively. 
The  trustees  covenanted  to  hold  said  stock,  shares  and  deben- 
tures, called  scheduled  securities,  in  trust,  and  from  the  income 
pay  expenses  of  the  trust,  not  to  exceed  a  certain  sum,  to  pay 
interest  at  six  per  cent  upon  the  face  value  of  the  certificates 
and  for  redemption  of  so  many  of  said  certificates  as  the  sur- 
plus income  would  permit.  Between  periods  of  distribution  of 
this  income,  the  trustees  could  make  investments  in  Exchequer 
Bills  or  the  income  deposited  in  bank  at  interest.  These  trustees 
were  also  given  power  to  sell  any  of  the  scheduled  securities 
upon  a  minimum  premium  above  what  they  were  purchased  for 
and  the  proceeds  of  sale  should  be  treated  as  surplus  income, 
unless  they  unanimously  resolve  and  their  resolution  be  con- 
firmed at  a  meeting  of  the  stockholders  that  other  securities  of 
the  same  character  be  purchased  and  held  subject  to  the  same 
trust  as  the  scheduled  securities.  Then  follow  provisions  for 
annual  meetings  for  stockholders,  which  meetings  may  receive 
reports,  appoint  auditors  and  elect  new  trustees  to  fill  vacancies. 
It  was  said  in  a  prospectus  inviting  investment  in  shares  of 
the  trust,  that :  "A  person  desirous  of  holding  Submarine  Cable 
shares  can  thus  by  a  minimum  of  trouble  and  expense  diminish 
the  risk  of  investing  in  any  one  particular  undertaking  by  spread- 
ing his  investment  over  a  number  of  undertakings."  The  holders 
of  these  certificates  far  exceeded  twenty  in  number.  Sir  George 
Jessel,  M.  R.,  went  into  an  elaborate  consideration  of  various 
clauses  and  summed  up  his  conclusion  as  follows:  "It  does  ap- 
pear to  me  that  this  is  as  plain  a  company  or  association  for 
the  transaction  of  business  for  the  purpose  of  gain  as  could  be 
put  fairly  into  words,  if  you  change  names  and  nothing  more. 
If  you  call  the  certificate  holders  'shareholders'  and  call  the 
trustees  'directors'  and  call  the  association  a  'company',  changing 
those  three  names,  you  have  about  as  simple  a  description  of 
an  ordinary  company  under  the  Act  as  I  think  you  can  well 
have.  I  am  satisfied,  as  far  as  I  am  concerned,  that  this  is 
not  only  within  the  words  of  the  Act,  but  is  the  very  thing  which 
the  Act  intended  to  prohibit  for  various  reasons,  and  that  this 

66 


CHAP.     VIII.]  SMITH    V.    ANDERSON.  [§     56. 

is  a  mere  device,  and  a  very  transparent  one,  to  endeavor  to 
escape  from  the  plain  meaning  of  the  enactment."  Evidently,  this 
case  must  have  been  argued  on  the  theory  that  this  arrange- 
ment was  a  mere  holding  trust,  but  Sir  George  Jessel's  analysis 
of  its  provisions  was  that  it  was  active,  with  trustees  to  em- 
ploy their  time  in  carrying  on  its  affairs  and  therefor  to  be  com- 
pensated. The  opinions  of  the  Lords  Justices  will  now  be  looked 
to  as  to  whether  they  regarded  the  trustees  or  the  cestuis  que 
trust  as  carrying  on  the  business. 

§  56.  Scope  of  Opinions  in  Smith  v.  Anderson  on  Appeal. — 
The  point  was  squarely  made  on  appeal  that  there  was  a  mere 
"trust  for  investment"  and  not  a  carrying  on  of  business.  The 
powers  given  the  trustees  were  called  merely  incidental  to  the 
main  object.  On  colloquy  with  counsel,  Brett,  Lord  Justice 
asked :  "What  is  the  'business'  here  ?"  And  counsel  replied : 
"The  Act  of  original  investment,  the  putting  out  the  money 
which  the  certificate  holders  contribute  and  the  management  of 
the  investments."  And  the  Lord  Justice  said :  "But  do  the  cer- 
tificate holders  carry  on  that  business?"  Counsel  then  replied: 
"Yes,  the  trustees  invest  as  servants  of  the  association."  Fur- 
ther along  James  L.  J.  asked:  "Can  the  certificate  holders  be 
held  liable  on  contracts?  Could  anybody  but  the  trustees  be 
made  liable  for  rent,  if  the  trustees  did  not  pay  it  ?"  Counsel  re- 
plied: <TWe  must  admit  that  there  would  be  great  difficulty  in 
suing  anyone  but  the  trustees."  James,  L.  J.,  after  premising, 
that  the  case  had  been  argued  very  fully  and  opportunity  had 
for  considering  it  since,  expressed  his  disagreement  with  the 
Master  of  Rolls.  He  said  the  Companies  Act  was  aimed  at  large 
trading  undertakings  by  large  fluctuating  bodies,  and  certainly 
did  not  apply  to  a  mere  investment  company  like  this.  Then  he 
says :  "Again,  if  there  is  any  business  at  all,  it  is  to  be  carried  on 
by  the  trustees.  Whatever  is  to  be  done  is  to  be  done  by  the 
trustees.  Now  the  Master  of  Rolls  appears,  from  his  judgment, 
to  have  considered  that  these  trustees  were,  in  substance  and  in 
law,  directors.  To  my  mind,  the  distinction  between  a  director 
and  a  trustee  is  an  essential  distinction  founded  on  the  very 
nature  of  things.  A  trustee  is  a  man  who  is  the  owner  of  the 

67 


§     58.]          TRUSTS    WITH     TRANSFERABLE    SHARES.  [CHAP.    VIII. 

property  and  deals  with  it  as  principal,  as  owner  and  as  master, 
subject  only  to  an  equitable  obligation  to  account  to  some  per- 
sons, to  whom  he  stands  in  the  relation  of  trustee,  and  who  are 
his  cestuis  que  trust.  *  *  *  *  The  office  of  director  is  that  of 
a  paid  servant  of  the  company.  A  director  never  enters  into  a 
contract  for  himself,  but  he  enters  into  contracts  for  his  prin- 
cipal, that  is,  for  the  company  of  whom  he  is  a  director  and 
for  whom  he  is  acting." 

§  57.  Smith  v.  Anderson — Continued. — Brett,  L.  J.,  after 
going  into  an  analysis  of  the  Companies  Act  and  concluding  this 
business  did  not  fall  under  it,  then  says:  "But  supposing  this 
was  such  a  business  as  was  mentioned  in  the  Act,  were  the 
certificate  holders  the  persons  who  were  to  carry  it  on?  It 
seems  to  me  that  certainly  they  were  not.  I  take  it  that  the 
persons  called  trustees  in  the  deed  are  clearly  trustees,  as  dis- 
tinguished from  agents  and  from  directors.  If,  indeed,  although 
they  were  called  trustees,  the  duties  which  they  had  to  per- 
form were  really  those  of  directors,  then,  although  they  were 
called  trustees,  the  legal  effect  of  the  deed  would  be  that  they 
would  be  directors,  and  if  they  are  directors  they  are  agents; 
but  here  it  seems  to  me  clear  that  according  to  true  construction 
of  the  deed,  they  were  not  directors  or  agents,  but  trustees.  If 
that  be  so,  the  certificate  holders,  even  if  they  were  associated 
at  all,  were  not  associated  for  carrying  on  the  business.  It  was 
not  their  business.  They  could  not  have  been  made  liable  for 
any  contract  made  by  the  trustees.  It  was,  of  course,  urged 
that  they  would  be  liable  as  undisclosed  principals.  But  that  as- 
sumes that  the  persons  who  made  the  contracts  upon  which  they 
are  to  be  liable  are  their  agents  authorized  to  bind  them  by 
their  contracts  which  is  obviously  not  true.  Therefore,  even 
if  there  be  here  a  business  within  the  meaning  of  the  section,  yet 
it  is  not  carried  on  by  the  certificate  holders." 

§  58.     Smith  v.  Anderson — Continued. — Colton,  L.  J.,  going 

more  particularly  into  the  acts  of  certificate  holders  in  respect 

of  the  management  of  the  trust,  said:     "In  my  opinion,  what 

must  be  shown  is  that  the  association  by  themselves  or  by  their 

68 


CHAP.    VIII.]  SMITH    V.    ANDERSON.  [§    59. 

agents  carry  on  a  business.  Now  here  what  can  be  said?  That 
the  certificate  holders  do  it  by  themselves,  can,  I  think,  hardly 
be  contended.  All  the  power  which  the  subscribers  of  this  money 
had  was  to  attend  sometimes  at  meetings.  The  only  business 
done  at  them  was  to  receive  and  consider  a  report  from  the  trus- 
tees on  the  condition  and  affairs  of  the  trust,  to  appoint  auditors 
to  audit  the  accounts  and  to  elect  new  trustees  to  fill  up  vacancies. 
It  is  impossible,  in  my  opinion,  to  say  that  the  certificate  holders 
are  by  themselves  in  any  way  carrying  on  any  business  by  reason 
of  what  is  done  at  these  meetings.  Then  clause  20  says,  that 
a  reinvestment  must  be  sanctioned  at  a  meeting  of  the  certificate 
holders  summoned  for  that  purpose.  *  *  *  All  that  is  here 
given  to  the  certificate  holders  is  the  power  to  give  such  assent 
as  cestuis  que  trust  usually  give  for  a  change  of  securities  when 
they  are  not  incapacitated  by  infancy  or  otherwise.  They  meet 
as  cestuis  que  trust  to  give  their  assent,  not  as  members  of  the 
partnership  joining  to  carry  on  and  control  the  business  of  the 
partnership  even  if  it  were  a  business."  He  then  goes  on  to 
show  that  it  is  of  no  concern  to  those  who  deal  with  the  trustees 
that  the  latter  are  to  account  to  the  cestuis  que  trust,  because  in 
dealing  with  the  trustees  "they  deal  with  those  persons  as  the 
only  persons  contracting  and  holding  themselves  out  as  personally 
liable." 

§  59.  Summary  of  the  Lords  Justices'  Opinions. — The  ex- 
cerpts above  made  possibly  were  preceded  by  more  of  detail  than 
is  strictly  necessary,  but  this  was  done  advisedly  to  show  that  the 
Master  of  Rolls  was  met  and  answered  upon  an  admission,  for 
the  sake  of  argument,  that  his  conclusion  that  there  was  a  carry- 
ing on  of  business  by  means  of  the  deed  constituting  the  trust. 
But  the  three  Lords  Justices  say  the  association,  or  the  partner- 
ship, if  it  may  be  so  called,  did  not  carry  on  the  business.  Two 
of  the  Lords  show  that  the  trustees  are  not  agents,  and  the  other 
intimates  that,  if  their  acts  were  controlled  or  directed  by  the 
certificate  holders  they  would  be,  and  then  he  reasons  that  the 
power  residing  in  the  certificate  holders  amounted  to  no  such 
control,  even  if  this  could  be  called  a  business  coming  under  the 
act.  In  a  word,  all  rule  that  the  number  of  certificate  holders 

69 


§     60.]          TRUSTS    WITH    TRANSFERABLE    SHARES.  [CHAP.    VIII. 

could  not  be  counted  under  the  limitation  as  to  twenty  or  more 
persons  associated  to  carry  on  business.  In  these  opinions  also, 
it  appears  that  the  status  of  a  cestui  que  trust,  as  based  on  owner- 
ship of  a  transferable  certificate  or  share,  is  completely  recog- 
nized, and  that  an  owner  of  a  certificate  entitled  to  receive  the  in- 
come of  a  business  carried  on  by  trustees  or  by  managers  of  a 
trust  embarked  in  business  is,  in  no  sense,  connected  with  their 
contracts  in  a  personal  sense,  so  far  as  third  persons  are  con- 
cerned. 

§  60.  Construing  These  Opinions  Through  Reference  to 
Former  Decisions. — The  basic  theory  upon  which  an  association 
is  a  partnership  to  carry  on  business  was  in  the  mind  of  James, 
L.  J.,  that  the  persons  forming  it  must  have  mutual  rights  and 
obligations,  and  it  is  insufficient  that  "they  happen  to  have  a 
common  interest  or  several  interests  in  something  which  is  to 
be  divided,  between  them."  And  for  this  he  refers  to  a  case  de- 
cided in  I860,8  which  is  referred  to  at  large  in  a  North  Dakota 
case,9  as  a  case  wherein  in  Exchequer  Chambers  the  six  judges 
were  equally  divided,  and  where  on  appeal  the  judges  were  re- 
quested to  give  their  opinions.  Again  six  judges  were  equally 
divided,  while  the  law  lords,  Campbell,  Brougham,  Cranworth, 
Wensleydale  and  Chelmsford,  were  unanimous.  The  question 
provoking  a  great  contrariety  of  reasoning,  was  whether,  where  a 
co-partnership  conveyed  to  trustees  their  business  to  be  carried 
on  for  the  benefit  of  their  creditors,  where  the  creditors  joined 
in  the  execution  of  the  deed,  were  authorized  thereby  to 
make  rules  for  its  conduct  or  to  put  an  end  to  it  altogether. 
The  deed  was  held  by  some  to  create  a  partnership,  and  the 
creditors,  therefore,  liable  for  the  contracts  of  the  trustees.  The 
reasoning  of  the  judges  holding  there  was  a  partnership  and 
the  creditors  liable  was  upon  the  theory  that  the  business  was 
under  their  control  and  carried  on  by  agents  for  their  profit, 
while  the  grantors  were  debarred  from  any  control  at  all.  The 
conclusion  of  non-liability  was  variously  based,  and  only  such 

8Cox  v.  Hickman,  8  H.  L.  C.  268,  9  C.  B.  (N.  S.)  47. 
9Wells  Stone  Mercantile  Co.  v.  Grover  (1898),  7  N.  D.  460,  75 
N.  W.  914. 
70 


CHAP.    VIII.]  COX   V.   HICKMAN.  [§    60. 

reasoning  need  be  quoted  or  referred  to,  as  involves  control  by 
beneficiaries  or  cestuis  que  trust  over  trustees  making  or  failing 
to  make  them  agents  and  not  trustees,  though  so  denominated. 
Mr.   Baron   Channell   said:     "The    fact  that  the  creditors   had 
power  to  put  an  end  to  the  management  by  the  trustees  and  to 
discontinue  the  business  and  to  require  the  property,  the  capital, 
to  be  sold  and  divided  amongst  them  in  satisfaction  or  part  satis- 
faction of  moneys  made  a  charge  on  the  property,  does  not  vary 
the  case  so  as  to  constitute  the  creditors  partners  in  the  business. 
They  had  no  power,  I  think,  by  virtue  of  the  deed  to  take  upon 
themselves  the  management  of  the  business."    Chief  Baron  Pol- 
lock, admitting  that,  if  the  trustees  were  merely  managers  under 
the  direction  of  the  creditors,  the  latter   would  be   liable   for 
debts  created  by  the  former,  then  says  the  latter  "have  no  power 
to  interfere  and  take  the  management  in  their  own  hands,"  al- 
though they  may  call  meetings  and  direct  the  discontinuance  of 
the  business  and  the  property  sold  and  divided  ratably  among 
themselves.     Lord  Cranworth,  speaking  of  the    status    of    the 
creditors  to  the  business,  said:     "The  trade  did  not  become  a 
trade  carried  on  for  them  as  principals,  because  they  might  have 
insisted  on  taking  possession  of  the  stock  and  so  compelling  an 
abandonment  of  the  trade,   or  because  they  might   have   pre- 
scribed terms  on  which  alone  it  should  be  continued.    Any  trus- 
tee might  have  refused  to  act,  if  he  considered  the  terms  pre- 
scribed by  the  creditors  to  be  objectionable."     While  the  other 
Lords  did  not  allude  to  this  special  power  in  the  creditors  to 
end  the  business  when  they  saw  fit,  their  opinions  say  "the  busi- 
ness was  to  be  carried  on  by  the  trustees,"  one  saying:     "Can 
we  collect  from  the  deed  that  each  of  the  subscribing  creditors 
is  a  partner  with  the  trustees  and  by  the  mere  signature  of  the 
deed  constitutes  them  his  agents  for  carrying  on  the  business 
on  the  account  of  himself  and  the  rest  of  the  creditors."     Mr. 
Justice  Williams,  in  taking  the  view  that  the  creditors  were  liable, 
asserted  that:  "The  trustees  are  placed  under  the    control    of 
the  general  body  of  the  creditors,  who  may,  at  their  pleasure, 
alter,  add  to,  or  diminish  the  powers,  trusts  and  provisions,  and 
may  in  effect,  appoint  new  trustees."     Justice  Crompton,  on  the 
same  side,  said:    "They  (trustees)  seem  to  me,  as  between  them 

71 


§  61.]  SUMMARY.  [CHAP.  VIII. 

(third  persons)  and  the  creditors  to  be  the  mere  agents  of  the 
creditors.  The  creditors  have  the  most  entire  control  of  the 
whole  concern.  They  are  expressly  empowered  to  give  any 
orders  or  directions  for  the  present  or  future  management,  and 
they  are  the  only  persons  to  whom  the  managers  can  look  for 
funds  in  the  event  of  the  property  left  in  the  concern  being  lost 
or  insufficient."  And  Justice  Blackburn  said:  "Now  it  seems  to 
me,  that  the  present  defendants  have,  by  the  deed  to  which  they 
are  parties,  stipulated  that  the  business  shall  be  carried  on  for 
their  benefit  and  under  their  control."  Thus  the  three  judges 
holding  to  liability  on  the  part  of  the  creditors  stress  the  fact 
of  control  being  given  by  the  deed  to  the  creditors  over  the 
trustees,  while  the  five  lords  and  the  other  three  judges  either 
directly  or  impliedly  deny  the  existence  of  such  control  in  and 
by  the  deed.  It  is  not  unfair  to  conclude  that,  had  the  minority 
construed  this  special  power  in  the  deed  as  did  the  majority, 
the  decision  would  have  been  unanimous,  that  the  creditors 
joining  in  the  deed  were  not  personally  liable  for  debts  created 
by  the  trustees. 

§  61.  Summary. — Cox  v.  Hickman  and  Smith  v.  Anderson, 
supra,  would  place  on  practically  indisputable  ground,  in  Eng- 
lish decision,  that  a  trustee  vested  with  the  legal  title  and  abso- 
lute control  of  property  in  a  trading  concern  is  not  an  agent 
of  cestuis  que  trust,  nor  are  they  responsible  for  his  acts  and 
contracts.  It  is  further  to  be  specially  observed,  that  these 
two  cases  consider  two  kinds  of  cestuis  que  trust,  those  whose 
interests  in  profits  in  a  trust  embarked  in  trade  depend  upon 
the  ownership  of  transferable  certificates  or  shares  of  stock 
and  those  whose  interests  are  defined  otherwise  by  the  deed  of 
trust,  namely,  the  aimount  of  the  indebtedness  of  creditors 
respectively.  This,  however,  seems  wholly  unimportant  as  af- 
fecting the  status  of  the  trustee  with  respect  to  third  persons 
and  the  non-liability  of  cestuis  que  trust.  Their  equitable  in- 
terest is  in  the  trust  estate,  and  as  said  in  a  Massachusetts 
case:10  "The  cestui  que  trust  takes  the  whole  legal  title  to 

lOBroadway  National   Bank  v.  Adams   (1882),   133   Mass.   170,  43 
Am.  Rep.  504. 

72 


CHAP.    VIII.]  SUMMARY.  [§    61. 

the  accrued  income  at  the  moment  it  is  paid  over  to  him."  This 
might  be  even  more  strongly  expressed  by  saying  that  he  takes 
the  whole  legal  title  to  the  accrued  income  at  the  moment  it 
should  be  paid  over  to  him,  because  beyond  that  time  there 
would  be  a  wrongful  withholding  by  the  trustee.  This  clears 
the  way  for  a  consideration  of  American  cases  on  the  line  pur- 
sued in  this  chapter. 


73 


CHAPTER  IX. 

CESTUIS  QUE  TRUST  IN  A  TRADING  TRUST — CONTINUED. 
American  Decisions. 

§   62.     Shareholders  as  Cestuis   Que   Trust. — A  joint  stock 
company  is  an  unincorporated  association  with  close  resemblance 
to  a  corporation.     The  essential   distinction  between  it  and  a 
corporation  is  that  the  holders  of  its  stock  are  partners  and, 
therefore,  there  is  not  that  separate  entity  between  it  and  its 
members  as  in  case  of  a  corporation  and   the   owners  of   its 
stock.     Business,  therefore,  carried  on  by  it  is  the  business  of 
a  partnership.     Whether,  however,  business  is  carried  on  by  it, 
when  a  trustee  of  a  trust  estate  in  trade  is  vested  with  full 
power  is  a  proposition  in  which  we  are  here  concerned,  as  ac- 
cessory to  the  basic  inquiry  in   this  treatise,   namely  whether 
individuals,   without   creating   a   partnership,    either   as   to   the 
world  or  inter  sese,  may  be  formed  for  the  purpose  of  profit  and 
cause  a  business  to  be  carried  on  for  the  associates  as  cestuis 
que  trust  with  no  personal  liability  on  them  for  the  acts  and 
contracts  of  that  business.   Incidentally  there  is  here  treated  joint 
stock  companies  to  ascertain  whether  identification  of  cestuis  que 
trust  may  be  made  through  ownership  of  shares  in  such  com- 
panies. In  the  first  place,  it  is  shown  in  many  ways  where  there  is 
merely  the  question  of  determining  interest  in  the  assets  of  a 
joint  stock  association,  that  a  share  of  stock  may  represent  an  in- 
terest, if  the  sum  of  the  certificates  represent  its  capital  stock.1 
This  principle  is  illustrated  in  a  Pennsylvania  case,  where  the 
trial  court  held  that  the  proceeds  of  the  sale  of  property,  the 
title  to  which  was  vested  in  a  trustee,  should  be  paid  over  to 
certificate  holders  in  an  unincorporated  association,  and  its  re- 
versal by  the  Supreme  Court  on  the  ground  that  the  association 
was  not  a  joint  stock  association,  though  certificates  of  shares 
INear  v.  Donnelly  (1890),  80  Mich.  130,  44  N.  W.  1118. 
74 


CHAP.   IX]  CESTUIS  AS  SHAREHOLDERS.  [§   62. 

were  issued  by  it  to  some  of  its  members  but  not  to  others 
who  also  contributed  to  the  purchase  of  this  property.  The 
court  said:  "The  certificates  issued  to  the  lenders  seemed  to 
have  been  intended  to  serve  as  evidence  of  the  amount  of 
money  borrowed,  and  as  an  informal  pledge  of  the  property 
bought  as  security  for  the  money  advanced."2  Thus  it  is 
shown,  that  it  was  necessary  to  get  away  from  the  fact  that 
the  certificates  were  representative  of  shares  for  a  reversal  of 
the  decision  of  the  lower  court.  In  these  two  cases  the  trusts 
were  merely  passive.  The  fact  that  such  an  association's  prop- 
erty is  distributable  among  its  shareholders  in  the  event  of  its 
dissolution  makes  it  seem  indisputable  that  a  share  is  an  in- 
terest in  property.3  This  is  enforced  so  strictly,  that  it  has 
been  held  that,  upon  dissolution,  trustees  cannot  without  the 
consent  of  all  the  stockholders  convert'  assets  into  anything  but 
money  and  distribute  them  ratably  to  shareholders,  a  mere 
majority  being  insufficient  for  this.4  A  New  Hampshire  court 
construed  an  agreement  for  the  formation  of  a  joint  stock  as- 
sociation as  meaning  that  nobody  but  subscribing  stockholders 
should  have  any  interest  in  the  business,  and  that  the  partner- 
ship among  them  was  dissolved  by  purchase  of  all  the  shares 
by  one  to  whom  the  business  then  belonged.5  This  is  to  say 
the  units  of  interest  make  in  the  aggregate  the  entire  interest. 
In  another  Pennsylvania  case  the  entire  assets  of  a  joint  stock 
association  were  vested  in  a  trustee,  whose  authority  to  act 
was  to  be  controlled  by  a  vote  of  its  members.  An  execution 
against  a  shareholder  was  levied  on  the  property,  and  it  was 
held  a  wrongful  levy  because  his  interest  was  represented  by 
transferable  shares,6  and  such  shareholders  are  cestuis  que 
trust.1  Some  at  least  of  the  above  cases  show  title  in  a  dry 
or  passive  trust,  but  the  rule  is  no  different  where  the  trust 

2Crawford  v.  Gross  (1891),  140  Pa.  297,  21  Atl.  356. 
SButterfield  v.  Beardsley  (1874),  28  Mich.  412. 
4Frothingham  v.  Barney   (1876),  6  Hun.   (N.  Y.)   366. 
SFarnum  v.  Patch  (1880),  60  N.  H.  294,  49  Am.  Rep.  313. 
SPittsburg   Wagon   Works'    Estate    (1903),   204   Pa.   432,   54   Atl. 
316. 

TQagett  v.  Kilbourne   (1861),  66  U.  S.  (Black)  346. 

75 


§63.]  ANY    CONTRIBUTORS   AS    CESTUIS.  [CHAP.    IX. 

is  active.8  The  Federal  Supreme  Court,  in  considering  the 
question  of  the  status  of  a  share  of  stock  in  a  partnership,  said 
through  Justice  Holmes:9  "We  may  assume  in  accordance 
with  a  favorite  speculation  in  these  days,  that  philosophically 
a  partnership  and  a  corporation  illustrate  a  single  principle, 
and  even  that  the  certificate  of  a  share  in  one  represents  prop- 
erty in  very  nearly  the  same  sense  as  does  a  share  in  the  other. 
In  either  case  the  members  could  divide  the  assets  after  pay- 
ing the  debts."  Then  he  proceeds  to  say  that  a  National  Bank 
cannot  acquire  a  share  in  a  partnership  because  this  makes  it 
a  member  of  the  partnership  with  liability  attaching  thereto. 

§  63.  Other  Contributors  as  Cestuis  Que  Trust. — Crawford 
v.  Gross,  supra,  went  so  far  in  sustaining  the  claim  that  any 
contributor  to  the  funds  of  an  active  business  enterprise,  in 
form  of  a  trust  estate,  was  entitled  to  a  proportional  interest 
in  its  capital  or  assets,  that  it  construed  a  paper  writing  issued 
by  its  managers  and  purporting  to  be  a  certificate  of  a  share 
to  be  evidence  of  money  loaned  and  an  informal  pledge  of 
its  property,  leaving,  in  effect,  the  contributors  not  holding 
such  certificates,  the  cestuis  que  trust.  In  an  Iowa  case  there 
was  an  agreement  between  two  parties  to  form  an  association 
for  the  purpose  of  buying  and  selling  land  in  Iowa.  It  pro- 
vided that  money  was  to  be  furnished  to  their  joint  agent,  who 
was  to  make  the  purchases,  title  to  be  taken  in  the  name  of 
a  third  person  as  trustee,  with  the  parties  to  have  equitable  in- 
terests respectively  according  to  his  contribution  to  the  fund. 
The  agent  was  to  sell  as  the  authorized  agent  of  the  trustee, 
who  was  to  distribute  the  proceeds.  One  of  the  contributors 
dying,  his  widow  was  held  not  entitled  to  claim  dower  in  the 

SHart  v.  Seymour  (1893),  147  111.  598,  35  N.  E.  246;  Oliver's 
Estate  (1890),  136  Pa.  43,  20  Atl.  527,  9  L.  R.  A.  421,  20  Am.  St. 
Rep.  894;  Phillips  v.  Blatchford  (1884),  137  Mass.  510;  Hussey  v. 
Arnold  (1904),  185  Mass.  202,  70  N.  E.  87;  Howe  v.  Morse  (1899), 
174  Mass.  491,  55  N.  E.  213. 

^Merchants'  Nat'l.  Bank  v.  Wehrmann   (1906),  202  U.  S.  295,  50 
L.  Ed.  1036. 
76 


CHAP.  IX.]  CREDITORS  AND  DEVISEES  AS  CESTUIS.  [§  66. 

land.10  The  court  said:  "Their  (contributors)  relation  to  the 
enterprise  was  very  much  like  the  relation  of  stockholders  to 
the  property  of  a  corporation." 

§  64.  Creditors  as  Cestuis  Que  Trust. — As  we  have  already 
seen  a  debtor's  business,  which  has  become  embarrassed,  may 
be  continued  by  being  run  by  a  trustee  for  the  creditors'  benefit. 
One  of  the  cases  we  have  referred  to  as  illustrating  this  ques- 
tion is  where  the  contention  was  made,  that  these  creditors 
were  liable  as  partners  in  the  business  that  was  being  carried 
on,11  a  question  to  which  the  next  succeeding  chapter  will  be 
mainly  devoted.  Another  case  also  hereinbefore  referred  to 
was  where  business  or  a  debtor  was  conveyed  to  a  trustee  to  be 
carried  on  in  interest  of  his  creditors,12  and  there  the  question 
considered  was  whether  the  trustee  was  or  was  not  liable  for 
negligence. 

§  65.  Devisees  as  Cestuis  Que  Trust. — The  Supreme  Court 
of  the  United  States  has  by  several  cases  held  that  a  testator 
might  authorize  the  continuance  through  trustees  of  a  busi- 
ness in  which  he  was  engaged  at  the  time  of  his  death,  making 
the  part  of  his  estate  embarked  therein  alone  liable  to  its  debts 
and  the  income  thereof  payable  to  cestuis  que  trust,  until  the 
business  ceases,13  and  so  has  it  been  held  elsewhere.14 

§  66.  Summary. — Thus  we  ascertain  that  by  settlors  and 
testators  a  trust  to  carry  on  business  may  be  created,  and,  by 
former  chapters  that  when  created  the  trustee  not  being  an 

lOMallory  v.  Russell  (1887),  71  Iowa  63,  32  N.  W.  102. 

11  Wells-Stone  Mercantile  Co.  v.  Grover  (1898),  7  N.  D.  460,  75 
N.  W.  914. 

l2Wright  v.  Caney  River  Ry.  Co.  (1909),  151  N.  C.  529,  66  S.  E. 
588,  19  Am.  &  Eng.  Anno.  Cas.  384. 

l3Burwell  v.  Mandeville's  Excr.  (1844),  2  How.  560,  11  L.  Ed. 
378;  Smith  v.  Ayer  (1879),  101  U.  S.  320;  Jones  v.  Walker  (1880),  103 
U.  S.  444. 

l4Mason  v.  Pomeroy  (1890),  151  Mass.  164,  24  N.  E.  202,  7  L. 
R.  A.  771.  . 

77 


§  66.]  SUMMARY.  [CHAP.  ix. 

.agent,  like  the  officer  of  a  corporation,  incurs  a  personal  li- 
ability for  his  acts  and  contracts  in  the  management  of  that 
trust.  Now  it  is  to  be  inquired,  whether  additionally,  and  under 
all  circumstances,  in  ordinary  contracts,  the  cestuis  que  trust 
are  personally  liable.  It  appears  thus  far,  that  it  is  immaterial 
to  the  formation  of  a  trading  trust,  or  possibly,  to  speak  more 
specifically,  to  the  embarking  of  a  trust  estate  in  trade,  what 
is  the  character  of  a  cestui  que  trust  or  how  he  becomes  such. 
There  must,  however,  be  a  legal  criterion  for  his  identifica- 
tion. In  this  aspect  the  general  legality  of  transferable  cer- 
tificates of  shares  in  a  joint  stock  company  is  necessary.  As 
we  have  seen15  such  legality  was,  for  a  ^me  at  least,  disputed 
in  England  because  of  the  "Bubble  Act",  and  when  it  was 
reasoned  out,  that  even  during  the  nearly  one  hundred  years 
this  act  was  in  force  they  were  not  illegal  per  se,  but  only  as 
connected  with  some  scheme  forbidden  by  that  act,  the  repeal 
of  the  act  did  away  with  all  claim  of  their  illegality.  Long 
after  that  repeal  it  was  urged  in  Massachusetts,  that  the  Bubble 
Act  being  in  force  on  July  4th,  1776,  was  still  in  force  in 
this  country.  Justice  Holmes  after  saying:  "It  is  too  late  to 
contend  that  partnerships  with  transferable  shares  are  illegal 
in  this  Commonwealth",  further  said :  "We  attach  little  weight 
to  the  argument  that  the  Bubble  Act  (St.  6  Geo.  1.  c.  18)  was 
made  applicable  to  America  in  1741  by  the  St.  of  14  Geo.  II  c. 
37,  by  which  among  other  things,  all  offenders  against  these 
acts  were  subjected  to  the  penalties  of  a  praemunire,  and  bro- 
kers dealing  in  the  shares  therein  referred  to  were  made  in- 
capable of  acting  as  brokers  for  the  future.  *  *  *  The  fact  that 
as  far  back  as  the  records  of  our  judicial  decisions  extend,  this 
act  has  not  been  practiced  on  in  the  courts,  but  has  been 
ignored  by  them,  is  strong  evidence  that  the  act  was  not  among 
those  that  were  kept  in  force  after  the  Revolution."16  It  is 
ventured  as  an  observation  that  in  every  other  of  our  states 
there  is  the  same  experience  as  in  Massachusetts.  In  New 
York  where  a  statute  exists  regulating  procedure  by  or  against 
joint  stock  associations,  this  statute  was  not  recognized  as 

iSChapter  VIII,    supra. 

ISPhillips  v.  Blatchford  (1884),  137  Mass.  510. 
78 


CHAP.    IX.]  SUMMARY.  [§    66. 

creating  an  original  right,  but  the  relations  of  members  were 
with  common  law  rights  and  liabilities  as  before  existing.17 
There  are  only  a  few  of  the  States  having  statutes  respecting 
the  organization  of  such  associations,18  and  wherein  these  may 
purport  to  create  a  new  right,  they,  no  doubt,  would  be  deemed 
merely  declaratory  of  the  common  law.  At  all  events,  as  we 
have  seen  by  English  decision,  transferable  shares  were  never 
forbidden  even  by  the  "Bubble  Act"  as  being  illegal  per  se. 

Moreover,  it  might  well  be  said  that  the  arguments  against 
transferable  shares  in  a  joint  stock  association  would  not  neces- 
sarily apply  to  a  trust  estate  in  business.  The  issue  of  trans- 
ferable shares  in  a  partnership  is  in  derogation  of  the  partner- 
ship principle  of  delectus  personal,  and  a  changing  body  of 
partners  is  difficult  to  identify  for  purposes  of  suit;  but  in  a 
trust  estate  the  cestuis  have  no  obligation  inter  sese  or  to  the 
world  at  large,  and  their  identity,  whether  changing  or  not,  is 
a  matter  of  indifference  as  far  as  third  parties  are  concerned. 
The  issue  of  certificates  to  them  is  merely  a  convenient  confir-  \ 
mation  of  their  ordinary  rights. 


ITeople  ex  rel.  Winchester  v.  Coleman  (1892),  133  N.  Y.  279.  31 
N.  E.  96,  16  L.  R.  A.  183. 

iSPennsylvania  Act  June  2,  1874;  Virginia,  Act  March  2,  1875; 
Mich.  Comp.  L.  1897  Ch.  160;  New  Jersey  Gen.  Stats.  1896  p.  2240; 
Ohio  Gen.  Code  1910,  sec.  8059;  New  York  Consol.  Laws  pp. 
1873-1876. 

79 


CHAPTER  X. 
NONLIABILITY  OF  CESTUIS  QUE  TRUST  OF  A  TRADING  TRUST. 

§  67.  Preliminary. — In  order  correctly  to  view  the  question 
whether  settlors  or  contributors  or  shareholders  in  a  trading 
trust  may  erect  same  and  liability  for  the  contracts  and  acts 
of  the  trustee  shall  not  affect  them  beyond  the  property  or 
assets  embarked  in  trade  through  that  trust,  it  seems  proper  to 
revert  briefly  to  what  has  been  said  as  to  the  relations  of  the 
trustee  and  the  property  to  which  he  holds  title  to,  his  acts  and 
contracts,  and  then  consider  the  cestuis  que  trust,  in  trading- 
trusts,  in  inverse  order  to  their  classification  in  Chapter  IX. 

§  68.  Liability  of  Trustee  to  Creditors. — In  Chapter  V, 
supra,  it  was  shown  that  a  trustee  is  not  an  agent,  but  he  is  a 
principal;1  that  he  adopts  the  same  risks  and  liabilities  as  per- 
sons who  trade  on  their  own  account;2  that  this  extends  in 
favor  of  creditors  even  when  he  does,  as  under  a  testamentary 
trust,  what  the  will  directs,  unless  he  stipulates  for  exemp- 
tion;3 thjat  to  release  him  from  liability  he  must  expressly 
stipulate,4  but  this  being  done  the  stipulation  is  effective,5 
especially  if  the  instrument  creating  the  trust  provides  that 
he  may  so  stipulate.6  Merely,  however,  designating  himself  as 
trustee  does  not  relieve  from  liability.7 

ITaylor  v.  Davis  (1884),  110  U.  S.  330,  28  L.  Ed.  163. 

2Hill  on  Trustees  (4th  Am.  Ed.)  534. 

SRoger  Williams'  National  Bank  v.  Groton  Mfg.  Co.   (1889),  16 
R.  I.  504,  17  Atl.  170. 

4Shoe  &  Leather  Nat'l.  Bank  v.  Dix  (1877),  123  Mass.  148. 

Bfiank  of  Topeka  v.   Eaton   (1900),   100   Fed.   8;   same   case   107 
Fed.  1003,  47  C.  C.  A.  140. 

6Hussey  v.  Arnold  (1904),  185  Mass.  202,  70  N.  E.  87. 

^Taylor  v.  Davis,  supra. 
80 


CHAP.    X.]  NONLIABILITY  OF   CESTUIS.  [§    70. 

§  69.  Liability  of  Trust  Estate. — In  the  case  last  cited  the 
court  said:  "The  trust  estate  cannot  promise",  and  notwith- 
standing it  cannot,  in  the  opinion  it  was  said  the  trustee  could 
stipulate  that  the  creditor  "is  to  look  solely  to  the  trust  estate." 
In  Chapter  VI  many  English  and  some  American  decisions  are 
produced  to  show  that  in  active  trusts  creditors  of  the  trustee 
may  avail  themselves  of  the  trustee's  right  of  indemnity  out 
of  the  trust  estate.  In  those  cases  the  language  used  is  upon 
the  theory  that  this  is  the  limit  of  the  creditors'  remedies.  In 
other  words,  a  creditor's  sole  contract  right  is  against  the 
trustee.  As  incidental  to  that,  equity  affords  him  a  right  by 
subrogation.  In  trusts  embarked  in  trade  it  was  ruled  credit- 
ors have  the  personal  responsibility  of  the  trustee  and  "some- 
thing like  a  lien  upon  the  estate  embarked  in  trade."8  There 
are  a  number  of  American  cases  cited  to  the  same  or  nearly 
the  same  effect,  all  of  which  at  least  recognize  the  personal 
liability  of  trustees,  one  of  them  saying:  "Generally  the  trus- 
tee must  alone  be  looked  to."9  In  Chapter  VII  authority  goes 
to  show  that  the  instrument  creating  the  trust  may  provide 
for  sole  liability  of  the  trust  estate  and  that  merely  embarking 
the  trust  in  trade  is  equivalent  to  an  express  direction  to  this 
effect.  Whether,  however,  the  latter  clause  of  this  statement 
be  true  or  not,  this  authority  considered  no  liability  beyond 
that  of  the  trustee  or  trust  property,  one  or  the  other,  or 
both. 

§  70.  Nonliability  of  Devisees,  Cestuis  Que  Trust  of  a  Trad- 
ing Trust. — Of  course,  the  only  basis  for  the  predication  of 
any  such  liability  would  be,  that  one  accepting  the  income  from 
the  carrying  on  of  a  business  thereby  acquiesced  in  occupying 
the  status  of  one  who  authorizes  the  acts  of  another  in  his  be- 
half, or  ratifies  them  by  acceptance  of  benefits.  It  may  be 
admitted,  that  a  cestui  under  a  will  could  not  be  regarded  as 
one  who  previously  authorizes  the  trustee  of  a  trust  embarked 
in  trade  to  make  contracts  or  perform  acts  in  the  prosecution 
of  its  business.  Would  he,  however,  by  accepting  benefits  from 

8Ex  parte  Garland  (1804),  10  Vesey  110. 
^Norton  v.  Phelps  (1877),  54  Miss.  467. 

81 


§    70.]  NONLIABILITY   OF   CESTUIS.  [CHAP.   X. 

acts  he  not  only  has  not  authorized,  but  which  he  could  neither 
authorize  nor  control,  be  said  to  take  the  onus  of  responsibility 
by  acceptance  of  their  benefits?  It  is  true,  ratification  implies 
the  power  to  authorize  in  the  first  instance,  and  one  form  of 
ratification,  as  well  as  another,  is  subject  to  this  implication. 
Thus,  speaking  of  ratification  by  acceptance  of  benefits,  it  has 
been  stated  that  this  does  not  apply  where  one  is  legally  en- 
titled to  what  he  has  received  without  assenting  to  the  act  of 
the  agent.10  But  to  apply  this  in  the  case  of  such  a  trust  is 
reaching  the  end  of  what  is  aimed  at,  which  is  that  there  is  a 
benefit  vesting  in  the  cestui  que  trust  independently  of  his  act 
or  volition,  but  which  presumptively  he  agrees  to  accept — a 
benefit  vesting  in  the  case  of  one  sui  juris,  just  as  in  case  of 
an  infant  or  one  non  compos  mentis.  It  is  to  be  taken,  there- 
fore, that,  unless  the  trustee  of  a  testamentary  trading  trust  is 
under  the  direction  and  control  of  its  cestuis  que  trust,  they 
cannot  be  made  personally  liable  for  his  acts  and  contracts. 
Whether  even  in  the  alternative — most  unusual,  if  not  unpre- 
cedented— there  would  be  the  relation  of  principal  and  agent, 
need  not  be  discussed.  However,  there  is  in  decision  by  the 
Federal  Supreme  Court  a  ruling  going  beyond,  and  necessarily 
inclusive  of,  the  theory  of  exemption  from  personal  liability  of 
cestui  que  trust  of  a  testamentary  trust  embarked  in  trade.11 
Justice  Miller  said :  "The  object  of  the  bill  is  two  fold,  namely, 
to  subject  the  property  of  the  deceased,  which  had  not  been  em- 
barked in  the  partnership  enterprise,  in  the  hands  of  the  de- 
visees, to  the  payment  of  the  partnership  debts,  and  to  recover 
from  the  defendants  money  which  they  had  received  as  divi- 
dends out  of  the  profits  of  the  business  after  the  death  of  the 
testator."  None  of  these  partnership  debts  were  in  existence 
at  the  death  of  the  testator,  but  grew  out  of  the  conduct  of 
the  business  subsequently.  The  plaintiffs  were  denied  relief 
altogether.  As  to  the  dividends  it  was  said :  "No  creditor 
whose  debt  was  in  existence  when  these  dividends  were  made 

lOBaldwin  Fertilizer  Company  v.  Thompson  (1899),  106  Ga. 
480r  32  S.  E.  591;  Forcheimer  v.  Stewart  (1887),  73  Iowa,  216,  32 
N.  W.  665. 

HJones  v.  Walker  (1880),  103  U.  S.  444. 
88 


CHAP.    X.]  NONLIABILITY   OF   CESTUIS.  [§    70. 

was  injured.  All  the  debts  then  existing  have  been  paid.  What 
right  had  subsequent  creditors  to  reclaim  these  dividends,  who 
had  no  interest  in  the  matter  when  they  were  paid?  *  *  *  If 
these  dividends  had  not  been  declared  in  good  faith,  nor  really 
earned;  if  they  had  diminished  the  capital,  or  if,  when  they 
were  made,  debts  existed  which  would  have  been  left  without 
means  of  payment,  the  persons  sharing  in  the  dividends  would 
probably  have  been  liable  to  these  creditors  to  the  extent  of 
the  money  so  received."  If,  however,  creditors  of  the  trust 
may  not  require  even  the  return  of  benefits  actually  received, 
because  entitled  to  be  distributed  according  to  the  provisions 
of  the  will,  a  fortiori  it  is  to  be  argued  that  cestuis  que  trust 
are  subject  to  no  personal  liability  for  the  acts  and  contracts 
of  the  trustee.  In  an  English  case  cited  and  quoted  from,12 
and  which  made  a  thorough  review  of  English  decision,  it  was 
said,  in  discussing  whether  the  general  estate  of  a  testator  was 
liable  for  the  debts  created  by  a  specific  part  being  embarked 
as  a  trust  estate  in  trade,13  that  the  cestui  que  trust  could  "not 
set  up  a  trustee,  who  may  be  a  man  of  straw  to  make  him  bank- 
rupt to  avoid  the  responsibility  of  the  assets  for  carrying  on 
the  trade."  No  other  responsibility  than  that  of  trustee  and 
assets  is  in  the  least  hinted  at,  and  creditors  were  precluded 
from  going  on  other  assets,  in  the  hands  of  whomsoever  they 
might  be.  Therefore  it  may  be  said  with  assurance,  that  a  trus- 
tee of  a  trading  trust  created  by  will  is  the  only  contracting 
party  and  the  limit  of  a  creditor's  right  is  to  resort  to  the  assets 
of  the  trust  for  the  trustee's  obligation — the  trustee's  indebted- 
ness being  of  the  same  general  character  as  that  of  any  contract- 
ing party.  So  far,  then,  it  appears  to  be  ascertained,  that  at 
least  by  a  will  there  may  be  a  trust  embarked  in  trade  and  that 
debts  and  defaults  created  by  its  management  must  depend 
solely  and  entirely  for  their  discharge  upon  the  liability  of  the 
trustee,  with  the  right  to  resort  or  not,  as  the  circumstances  of 
a.  particular  case  may  justify,  to  the  assets  embarked  in  trade. 
There  should  be  noticed  here  a  Mississippi  case,14  expressly 

l2Chapter  VI   ante. 

I31n  re  Johnson  (1880),  15  Ch.  D.  548. 

14Norton  v.  Phelps  (1877),  54  Miss.  467. 

83 


§    71.]  NONLIABILITY   OF   CESTUIS.  [CHAP.    X. 

approved  by  the  Federal  Supreme  Court,15  where  there  was  a 
deed  of  trust  providing  for  the  management  by  trustees  of  a 
plantation  for  the  benefit  of  certain  cestuis  que  trust.  Creditors 
furnished  supplies  reasonably  needed  for  its  conduct  and  sought 
to  subject  the  trust  estate  to  payment  therefor.  The  court  said : 
"Generally  the  trustee  alone  must  be  looked  to.  He  stands  be- 
tween the  creditor  and  the  estate.  He  represents  the  estate  and 
deals  for  it.  He  is  entitled  to  reimbursement  out  of  the  trust 
estate  for  all  disbursements  rightfully  made  by  him  on  account 
of  it,  and  creditors  must  get  payment  from  him;  but  when 
they  cannot  do  that,  and  it  is  right  for  the  trust  estate  to  pay 
the  demand  and  it  owes  the  trustee,  or  would  owe  him,  if  he 
had  paid  or  should  pay  the  demand,  the  rule  founded  in  policy, 
which  denies  the  creditor  access  to  the  trust  estate,  yields  to 
higher  considerations  of  justice  and  equity;  and  in  order  that 
justice  may  be  done,  the  creditor  may  be  substituted,  as  to  the 
trust  estate,  to  the  exact  position  which  the  trustee  would  oc- 
cupy, if  he  had  paid  or  should  pay  the  demand  and  seek  to 
obtain  reimbursement  out  of  the  estate."  But  no  trustee  could 
ever  be  supposed  to  have  a  right  of  action  against  the  cestui 
que  trust,  and,  therefore,  through  the  doctrine  of  subrogation, 
no  creditor  of  the  trustee  could  derive  an  action  against  the 
cestui  que  trust. 

§  71.  Making  Creditors  Cestuis  Que  Trust  by  Deed  of  As- 
signment.— A  very  elaborate  case  decided  in  North  Dakota,16 
hereinbefore  referred  to  more  than  once,  is  one  of  the  few  de- 
cisions involving  squarely  the  question  whether  cestuis  que  trust 
in  a  trust  associated,  so  that  a  business  might  be  carried  on,  be- 
came thereby  merely  principals  of  the  trustee  as  their  agent, 
and  as  such  liable,  as  a  partnership,  for  the  debts  created  by 
the  trustee  in  the  conduct  of  that  business.  By  this  deed  of  trust 
the  trustee  was  to  convert  the  property  transferred  to  him  for 
the  payment  of  the  debtor's  debts  and  to  make  new  purchases 

ISHewitt  v.   Phelps  (1881),  105  U.  S.  393. 

l6Wells-Stone    Mercantile    Co.   v.    Grover    (1898),    7    N.    D.    460, 
75  N.  W.  914. 
84 


CHAP.    X.]  NONLIABILITY   OF   CESTUIS.  [§    71. 

and  carry  on  the  business  should  he  deem  this  course  wise. 
The  creditors  were  sued  by  plaintiff  for  goods  sold  to  the  trus- 
tee and  plaintiff  rested  his  claim  for  recovery  upon  the  trustee 
being  given  the  distinct  right  to  buy  for  the  replenishing  of 
stock.  The  deed  said  also:  "Said  trustee  shall  operate  and 
manage  said  business  in  the  ordinary  way  of  retail  trade,  unless 
and  until  he  shall  become  satisfied,  that  the  interests  of  said 
creditors  will  be  best  subserved  by  closing  out  said  business." 
This  case  was  first  disposed  of  by  the  court  holding  that  the 
joining  by  the  creditors  was  to  be  taken  merely  as  assent  on 
their  part  for  their  debtor  to  continue  the  old,  and  not  establish 
a  new,  business.  When,  however,  it  was  pointed  out,  on  mo- 
tion for  rehearing,  that  the  demurrer  to  the  complaint  was 
sustained  as  to  the  assignor  as  well  as  to  the  creditors,  then 
the  court  said:  "As  the  court  below  overrule^!  the  demurrer 
as  to  him  also,  we'  must,  to  sustain  its  action,  hold  that  he,  as 
well  as  his  creditors,  is  not  liable  for  the  property  sold  to  the 
trustee,  while  such  trustee  was  administering  the  trust.  Such 
is  our  view.  The  instrument  created  a  trust  which  placed  the 
control  of  the  property  and  the  business  entirely  beyond  the 
assignor  so  long  as  the  trust  shall  continue."  Here  is  an  un- 
qualified statement  to  the  effect  that,  in  a  legally  created  trust 
embarked  in  trade  with  control  passing  entirely  from  a  settlor, 
the  latter  is  not  responsible  for  debts  created  in  its  manage- 
ment. The  opinion  then,  after  speaking  of  the  trustee's  ac- 
countability in  equity  for  proper  management,  says :  "It  was 
the  business  of  the  trustee,  so  long  as  the  trust  continued;  the 
assignor  having  only  an  indirect  interest  in  the  successful  man- 
agement thereof.  He  was  not  the  proprietor  of  the  business  and 
the  trustee  was  not  his  agent.  It  is  always  the  case  that  the 
trustee  has  no  interest  in  the  management  of  the  affairs  con- 
fided to  him  by  the  trust  instrument  and  that  the  cestui  que  trust 
is  the  only  person  beneficially  interested  therein.  And  yet  it 
has  never  been  held,  or  even  supposed,  that  the  beneficiary  is 
liable  for  debts  contracted  by  the  trustee  in  so  handling  the 
property  as  to  create  an  income  for  such  beneficiary."  Con- 
sidering that  this  statement  was  made  when  a  trust  in  trade  was 
before  the  court  and  express  power  given  to  make  purchases  in 

85 


§    72.]  NONLIABILITY   OF    CESTUIS.  [CHAP.    X. 

its  conduct,  its  importance  is  manifest.  In  no  whit  abating  from 
its  comprehensiveness,  the  court  further  says :  "The  assignor  by 
the  trust  deed  parted  with  the  ownership  of  property  and  all 
control  over  the  business  he  had  been  carrying  on."  The  court 
then  says  the  assignor  stood  to  the  property,  just  as  if  the  deed 
of  trust  had  been  made  by  a  third  person  with  the  same  resultant 
benefit  to  this  assignor.  The  court  also  says:  "There  is  no 
hardship  in  the  doctrine  that  the  beneficiary  is  not  liable  in  such 
a  case.  The  person  with  whom  the  creditor  deals  (i.  e.,  the 
trustee)  is  himself  personally  liable.  If  such  creditor  is  un- 
willing to  trust  him,  such  creditor  can  refuse  to  sell  him  on 
credit.  And  in  a  proper  case  the  creditor  may  resort  to  the 
trust  estate  itself  for  his  pay.  It  would  indeed  be  an  anomaly 
in  the  law,  if  one  could  be  held  responsible  for  goods  that  he 
had  not  purchased  or  agreed  to  pay  for,  and  which  were  not 
sold  to  his  agent,  but  were  purchased  by  a  third  person  to  use 
m  a  business  carried  on  by  such  third  person,  the  defendant 
having  no  control  thereover."  It  is  impossible  to  see  how  a 
court  could  more  pointedly  declare  that,  howsoever  a  trading 
trust  be  formed,  yet,  if  it  be  validly  created  and  the  trustee 
be  in  full  control,  no  third  person,  whatsoever  his  interest  in 
it  may  be,  will  be  responsible  for  its  contracts.  In  the  court's 
ruling  as  to  liability  of  the  creditors  its  attention  seems  to  have 
been  drawn  away  by  an  English  case17  from  the  broader  ques- 
tion. 

§  72.  Review  of  the  English  Case  Above  Alluded  to. — Quite 
extensive  reference  has  been  made  to  Cox  v.  Hickman,  supra,18 
from  another  point  of  view.  Here  it  may  be  well  to  lay  em- 
phasis on  the  point  that  all  of  the  judges  who  found  that  the 
creditors  were  partners  in  control  of  the  trust  estate  embarked 
in  trade,  created  by  the  joint  deed  of  a  debtor  and  his  creditors, 
so  found  because  they  were  deemed  to  have  control  over  him. 
But  some  of  those  and  the  Lords  of  the  opposite  view,  thought 
there  was  no  such  control,  and  then  too,  for  other  reasons,  the 
creditors  were  deemed  not  liable.  In  other  words,  it  seemed 

17Cox  v.  Hickman  (1860),  9  C.  B.  (N.  S.)  98,  8  H.  L.  C.  268. 
ISChapter  VIII. 
86 


CHAP.    X.]  NONLIABILITY   OF   CESTUIS.  [§    73. 

to  be  with  judges  declaring  the  creditors  liable  a  necessary  in- 
gredient of  non-liability,  that  the  trustee  should  be  vested  with 
full  control,  while,  with  those  of  opposite  view,  they  might  not 
have  been  liable,  if  the  trustee's  control  were  even  limited.  It 
might  be  said,  therefore,  that  had  all  agreed  in  construction 
of  the  deed  that  the  trustee  had  absolute  control,  he  and  the 
trust  property  only  could  be  held,  and  not  the  creditors  also. 

§  73.  Contributors  Other  Than  Shareholders. — It  might  be 
argued  that  the  North  Dakota  case,19  above  discussed,  does  not, 
so  far  as  was  necessary  to  its  decision,  embrace  the  proposition 
of  solvent  contributors  to  the  formation  of  a  trading  trust  not 
being  liable  for  the  debts  and  contracts  of  its  trustee.  The 
reasoning,  it  is  true,  is  sufficiently  comprehensive  to  cover  such 
a  proposition,  but  there  it  was  said:  "It  was  the  business  of 
the  trustee  so  long  as  the  trust  continued,  the  assignor  having 
an  indirect  interest  in  the  successful  management  thereof." 
More  accurately  stated,  the  assignor  had  a  resultant  interest  in 
the  successful  management.  But  an  ordinary  cestui  que  trust 
would  have  an  immediate  interest.  But  it  is  difficult  to  see  how 
the  quality  of  the  interest,  one  being  vested  as  well  as  the  other 
and  either  capable  of  being  reached  by  process  at  law  or  in 
equity  by  a  creditor,  is  material.  As  seen,  supra,20  the  legal 
title  to  accrued  income  in  the  cestui  que  trust,  and,  generally  by 
the  authorities  cited  in  that  chapter,  anything  reserved 
for  the  benefit  of  the  cestui  que  trust  is 'both  alienable  and  sub- 
ject to  his  debts  and  contracts,  and  that  any  other  course  is 
contrary  to  public  policy.21  Therefore,  it  is  concluded,  that 
the  principle  which  relieved  the  assignor  in  the  North  Dakota 
case  is  no  way  distinguishable  so  as  not  to  embrace  any  other 
settlor  of  a  trust  embarked  in  trade.  We  have  also  seen  supra22 
that  contributors  to  the  formation  of  a  trust  for  trading  pur- 

l9Wells-Stone   Mercantile   Co.  v.   Grover,  supra. 

SOQiapter  III;  Broadway  National  Bank  v.  Adams  (1882),  133 
Mass.  170. 

2lPacific  Bank  v.  Windram   (1882),  133  Mass.  175. 

22Qiapter  IX  ante,  citing  Crawford  v.  Gross  (1891),  140  Pa.  297, 
21  Atl.  356  and  Mallory  v.  Russell  (1887),  71  Iowa,  63,  32  N.  W.  102. 

87 


§    74.]  NONLIABILITY   OF   CESTUIS.  [CHAP.    X. 

poses  stand  in  every  way  to  the  trust  as  do  shareholders  in 
an  unincorporated  association.  Therefore,  the  reason  and  spirit 
of  any  rule  of  law  applying  to  one  would  apply  to  the  other. 
Concert  in  action  and  purpose  establishes  an  association  behind 
the  trust  in  the  one  case  as  well  as  in  the  other. 

§  74.  Nonliability  of  Cestuis  for  the  Contracts  of  Trustee. 
— It  is  sought  to  stress  in  every  way  the  fact,  that  a  joint  stock 
company  is  in  itself  a  partnership,  and  that  there  is  individual 
liability  of  the  partners  for  all  acts  and  contracts  of  such  part- 
nership. But  the  claim  is,  that  the  members  of  a  partnership 
as  such  may  as  well  have  an  interest  in  a  trust,  the  creation  of 
which  is  the  principal  reason  of  there  being  a  partnership  inter 
sese,  without  their  being  personally  liable  for  the  contracts  of  the 
trustee  of  such  trust,  regularly  incurred  in  its  management. 
Thus  recurring  to  the  case  of  Smith  v.  Anderson,23  referred  to 
at  such  length  in  Chapter  VIII,  it  is  seen  that  it  is  not  dis- 
puted either  by  the  Master  of  Rolls,  whose  ruling  was  reversed, 
nor  by  the  three  Lords  Justices,  reversing  him,  but  that  such  a 
partnership  could  be  behind  a  trust  embarked  in  business,  where 
complete  control  is  committed  to  the  trustee.  The  Master  of 
Rolls  was  overruled  on  two  propositions.  He  held  that  the 
investment  by  the  trustees  in  securities  for  the  benefit  of  mem- 
bers of  a  partnership,  their  interests  being  represented  by  trans- 
ferable shares,  and  looking  after  the  sale  and  reinvestment  of 
proceeds  was  a  carrying  on  of  business,  and  that  the  associa- 
tion or  the  partnership  was  formed  to  carry  on  business.  The 
Lords  Justices  said  that  such  an  arrangement  was  not  a  carry- 
ing on  of  business  and,  even  if  it  were,  the  association  was 
not  formed  to  carry  it  on.  The  Master  of  Rolls  said  the  scheme 
was  a  very  transparent  one  to  endeavor  to  escape  the  require- 
ments of  an  Act  requiring  registration  of  partnerships  "formed 
for  the  purpose  of  carrying  on  any  business  that  has  for  its  ob- 
ject the  acquisition  of  gain,  where  they  include  more  than 
twenty  persons."  The  gainful  purpose  was  admitted  by  all  and, 
conceding  that  the  design  was  that  business  should  be  carried 
on,  all  the  Lords  said  the  partnership  was  not  formed  to  carry  it 

23(1880),    15    Ch.    D.   247. 

83 


CHAP.   X.]  NONLIABILITY   OF   CESTUIS.  [§    75. 

on.  It  was  admitted,  too,  by  all  of  them,  that  though  the  man- 
agers were  called  "trustees",  yet  if  "the  duties  they  had  to  per- 
form were  really  those  of  directors,  then  the  legal  effect  of  the 
deed  would  be  that  they  would  be  directors,  and  if  they  are  di- 
rectors, they  are  agents."  Then  Brett,  L.  J.,  says:  "But  it 
seems  to  me  clear  that  according  to  the  true  construction  of 
the  deed,  they  were  not  directors  or  agents,  but  trustees.  If 
that  be  so,  the  certificate  holders,  even  if  they  were  associated 
at  all,  were  not  associated  for  carrying  on  the  business."  Being 
not  so  associated,  the  Lord  Justice  draws  these  conclusions: 
"It  was  not  their  business.  They  could  not  have  been  made 
liable  for  any  contract  made  by  the  trustees."2*  He  proceeds 
then  to  emphasize  these  conclusions  as  follows:  "It  was  of 
course  urged  that  they  would  be  liable  as  undisclosed  principals. 
But  that  assumes  that  the  persons  who  made  the  contracts  upon 
which  they  are  liable  are  their  agents  authorized  to  bind  them 
by  their  contracts  which  is  obviously  not  true"24  The  only 
reason  for  such  obviousness  is,  of  course,  that  the  deed  of  trust 
did  not  create  any  agents  but  trustees.  Colton,  L.  J.,  thus  ex- 
pressed his  view  as  to  personal  liability  of  the  certificate  holders : 
"The  fact  that  they  (the  trustees)  are  to  account  to  others  for 
the  profits  made  is  a  matter  utterly  immaterial  as  between  them 
and  those  with  whom  they  deal.  They  deal  with  those  persons 
as  the  only  persons  contracting  and  hold  themselves  out  as 
personally  liable.  Those  persons  have  no  right  whatever  as 
against  the  persons  beneficially  entitled."24  Further  along  he 
stresses  this  non-liability  on  the  part  of  the  certificate  holders, 
as  follows:  "So  far  as  there  is  any  business  to  be  carried  on 
it  is  the  business  of  the  trustees,  not  as  agents  for  principals  be- 
hind, but  their  own  business,  that  is  to  say,  a  business  in  which 
they  contract  as  solely  liable  to  outsiders,24  whatever  may  be 
their  rights  as  against  those  for  whom  they  are  trustees." 

§  75.  Nonliability  of  Cestui  on  Contracts  of  Trustee — Cont'd. 
— While  the  question  of  liability  of  certificate  holders  was  not 
directly  involved  in  Smith  v.  Anderson,  supra,  yet  this  find- 
ing of  non-liability  cannot  be  considered  as  obiter  dictum,  be- 

24ltalics  by  author. 

89 


§    75.]  NONLIABILITY    OF    CESTUIS.  [CHAP.    X. 

cause  the  question  whether  there  existed  the  relation  of  prin- 
cipal and  agent,  which  was  directly  involved,  contained  the  con- 
clusion of  liability  vel  non  of  the  cestuis  que  trust,  that  is  to 
say  the  certificate  holders  as  members  of  a  partnership  interested 
in  the  trust  but  not,  necessarily,  behind  the  trustee.  To  ascer- 
tain whether  there  was  the  relation  of  principal  and  agent  the 
status  of  trustee  as  known  to  the  law  was  considered  and  it 
was  declared  there,  as  was  said,  in  Taylor  v.  Davis,25  by  Jus- 
tice Woods,  a  trustee  was  himself  a  principal,  because  of  his 
having  legal  title  and  capacity  to  contract.  Ex  vi  termini  the 
creation  of  a  trust  estate  is  notice  to  one  dealing  with  a  trustee 
that  he  contracts  in  a  personal  capacity,  unless  he  stipulates  for 
exemption.  It  is  well  argued  in  Bank  of  Topeka  v.  Eaton26 
that  a  trustee  could  stipulate  for  exemption  from  personal  liabil- 
ity, just  as  an  individual  might,  without  the  essence  of  all  ob- 
ligation disappearing,  if  the  former  remitted  the  obligee  to 
the  trust  property  or  the  individual  made  a  specific  pledge  of 
property  as  security.  The  stipulation  by  the  trustee  was  re- 
garded as  valid  solely  for  the  reason  that  trust  property  is 
under  control  of  a  court  of  equity.  In  other  words,  a  valid  stipu- 
lation was  needed  to  exempt  a  trustee  from  individual  liability, 
just  as  a  specific  pledge  is  needed  to  exempt  an  individual  not 
a  trustee.  No  one  disputes  that  an  executor  cannot  bind  an 
estate  for  his  contracts  for  its  benefit,  though  he  have  his  right 
to  reimbursement  for  proper  expenditures.  This  case  suggests 
that  it  might  not  have  been  impossible  for  the  trustees  under  the 
declaration  of  trust  to  "have  incurred  indebtedness  under  such 
circumstances  that  the  law  would  impose  a  personal  liability  on 
the  shareholders,"  yet  also  squarely  holds,  that  where  the  trus- 
tee gave  a  note  referring  to  a  declaration  of  trust  which  pro- 
vided that  only  the  trust  property  should  be  liable,  then  there 
was  an  implied  agreement  in  accepting  the  note  to  abide  by  the 
terms  of  the  articles  of  association.  The  case  may,  therefore, 
be  deemed  as  direct  authority  on  the  proposition,  that  a  trustee 
primarily  liable  may  contract  with  a  debtor  that  the  trust  estate 

25(1884),   110  U.   S.  330,  28  L.   Ed.  163. 

26(1900),  100  Fed.  8,  expressly  approved   107  Fed.   100,  47  C.  C. 
A.  140. 

90 


CHAP.    X.]  NONLIABILITY  OF   CESTUIS.  [§    76. 

shall  be  solely  liable.  If  a  trustee  can  provide  for  his  own  ex- 
emption from  liability — his  being  a  primary  liability — a  fortiori, 
it  is  to  be  said,  that  the  creditor's  agreement  to  look  solely  to 
the  trust  estate  should  bind  him.  In  Taylor  v.  Davis,  supra,  the 
opinion  quotes  with  approval  the  following  from  Story  on  prom- 
issory notes:  "As  to  trustees,  guardians,  executors  and  ad- 
ministrators and  other  persons  acting  en  autre  droit,  they  are  by 
our  law  generally  held  personally  liable  on  promissory  notes, 
because  they  have  no  authority  to  bind  ex  directo  the  persons 
for  whom,  or  for  whose  benefit,  or  for  whose  estate  they  act, 
and  hence  to  give  any  validity  to  the  note,  they  must  be  deemed 
personally  liable  as  makers."  As  appears  by  Norton  v.  Phelps, 
supra,  approved  in  Hewitt  v.  Phelps,  supra,  the  rule  is  not  con- 
fined at  all  to  written  promises,  but  extends  to  those  by  parol, 
either  express  or  implied.  There  is  lack  of  "authority  to  bind 
ex  directo"  cestuis  que  trust.  This  principle  is  squarely  recog- 
nized and  its  controlling  effect  made  more  manifest  by  a  distinc- 
tion reasoned  out  in  a  North  Carolina  case,27  where  a  trust 
estate  was  held  liable  for  negligence  of  the  trustee.  It  was  held 
liable  on  the  theory  that  the  beneficiaries  were  by  the  deed  of 
trust  "expressly  given  the  right  of  interference  and  control  in 
the  main  purpose  of  the  trust,"  but  even  in  such  a  case  the  trus- 
tee, it  was  held,  would  also  be  personally  liable.  One  may  not 
approve  entirely  this  reasoning,  but  it  at  least  goes  upon  the 
theory  that  a  trustee  always  pledges  his  personal  liability  and 
only  under  special  circumstances  may  creditors  have  any  further 
remedy. 

§  76.  Nonliability  of  Cestui  Que  Trust  on  Contracts  of  Trustee 
— Continued. — As  said  above  in  referring  to  Wells-Stone  Mer- 
cantile Co.  v.  Grover,  supra,  that  that  case  is  one  of  the  few 
decisions  showing  direct  attempt  to  hold  cestuis  que  trust  liable 
for  the  contracts  of  a  trustee,  and  even  there  the  deed  of  trust 
was  endeavored  to  be  construed  as  a  command  by  principals  to 
their  agent  to  do  a  certain  thing  instead  of  vesting  him  with 

27(1909),  Wright  v.  Caney  River  Ry.  Co.,   151   N.  C.  529,  66  S. 
E.  588,  19  Am.  &  Eng.  Anno  Cas.  384. 

91 


§    76.]  NONLIABILITY   OF   CESTUIS.  [CHAP.    X. 

title  for  a  certain  purpose  with  uncontrolled  authority  for  its 
execution.  In  Massachusetts  numerous  cases  appear,  where  in- 
terests in  trust  estates  embarked  in  trade  were  represented  by 
transferable  shares  in  joint-stock  associations,  though  that  State 
has  no  statute  specifically  recognizing  or  regulating  joint-stock 
companies.  The  furthest  legislation  has  gone  there  has  been,  it 
is  thought,  to  refer  to  such  shares  under  its  revenue  laws.  These 
associations  there  are  regarded  as  partnerships  and  partnership 
liability  has  been  enforced  against  holders  of  their  shares,  but 
never,  the  confident  assertion  is  made,  where  title  to  the  prop- 
erty or  capital  in  trade  was  vested  in  a  trustee  to  manage  it, 
uncontrolled  by  the  officers  of  the  joint-stock  association.  In 
one  of  these  cases  only  do  we  find  any  attempt  to  enforce  part- 
nership liability  under  such  circumstances.28  The  opinion  is 
brief  and  the  statement  of  facts  needs  to  appear  somewhat  fully. 
There  was  a  declaration  or  deed  of  trust  by  an  inventor  of  an 
improvement  in  pneumatic  engines.  This  instrument  vested  in 
trustees  grantor's  interest  in  all  patents  in  this  and  foreign 
countries,  to  hold,  manage  and  dispose  of  the  same  or  any  part 
thereof  to  others  upon  such  terms  and  conditions  as  to  a  major- 
ity of  the  trustees  shall  deem  best  and  pay  over  net  avails  to 
scrip  owners  according  to  their  several  interests.  Certain  scrip 
"was  to  be  issued  to  take  up  outstanding  scrip  and  "for  the  rais- 
ing of  additional  capital  for  the  more  advantageous  disposal  of 
grantor's  invention  under  letters  already  granted  and  those  to 
be  applied  to  foreign  governments."  It  was  alleged  that  a  large 
amount  had  been  sold.  The  trustees  hired  certain  premises  from 
plaintiff.  A  bill  was  filed  praying  for  disclosure  of  the  names 
and  places  of  residence  of  the  scrip  owners  as  partners,  that 
they  might  be  summoned  and  thereafter  a  decree  be  entered  that 
the  trustees  and  scrip  owners  as  co-partners  owe  the  plaintiff, 
etc.  A  demurrer  was  sustained.  On  appeal  this  was  affirmed. 
Allen,  J.,  speaking  for  the  court  said:  "The  deed  of  trust  does 
not  have  the  effect  to  make  the  scrip  holders  partners.  It  does 
not  contemplate  the  carrying  on  of  a  partnership  business  upon 
the  joint  account  of  the  grantor  and  the  scrip  holders,  and  in 
this  respect  the  case  is  unlike  Gleason  v.  McKay,  134  Mass.  419, 

28Mayo  v.  Moritz  (1890),  151  Mass.  481,  24  N.  E.  1083. 
92 


CHAP.  X.]  NONLIABILITY  OF   CESTUIS.  [§    77. 

and  Phillips  v.  Blatchford,  137  Mass.  510.  The  scrip  holders 
are  cestuis  que  trust,  and  are  entitled  to  their  share  of  the  avails 
of  the  property  when  the  same  is  sold.  If  the  trustees  contracted 
a  debt  to  the  plaintiff,  they  are  liable  for  it  personally,  and  an 
action  at  law  may  be  maintained  by  him  against  them.  Creditors 
may  also  resort  to  the  fund  under  proper  circumstances."  It  is 
not  intimated  here  that  there  was  no  business  to  be  carried  on. 
The  case,  however,  would  seem  to  need  for  its  fuller  under- 
standing a  consideration  of  the  two  cases  it  cites. 

In  the  former  of  said  cases  the  declaration  of  trust  declared 
grantor  held  the  property  in  trust  for  certificate  holders.  After 
its  execution  and  the  issue  of  certificates  the  shareholders  held 
a  meeting,  chose  an  executive  committee  and  adopted  by-laws, 
and  the  business  was  run  by  an  executive  committee.  The  value 
of  shares  consisted  chiefly  in  their  interest  in  letters  patent.  The 
question  in  this  case  was  of  their  taxability  like  shares  in  a  cor- 
poration, but  in  the  case  the  business  was  run  by  the  share- 
holders, while  in  that  which  it  refers  to  it  was  run  by  the  trustees. 
In  the  other  case29  there  was  a  partnership  under  a  declaration 
of  trust  with  transferable  shares.  The  business  was  to  be  en- 
tirely under  the  control  of  managers,  of  whom  the  trustee  was 
to  be  a  member,  and  the  other  members  were  to  be  elected  by 
the  shareholders.  In  this  case  a  shareholder  as  a  partner  was 
sued  and  held  liable.  Judge  Holmes  said:  "If  shareholders 
choose  to  purchase  stock  in  a  partnership  with  unlimited  per- 
sonal liability,  it  is  their  own  look  out."  These  two  cases  ap- 
pear to  explain  very  clearly  the  ruling  in  Mayo  v.  Moritz,  supra. 
It  means,  we  think,  that  a  transferable  share  in  a  business  con- 
ducted by  an  association  issuing  the  shares  is  a  business  con- 
ducted on  the  joint  account  of  the  shareholders,  while  such  a  busi- 
ness conducted  exclusively  by  trustees,  is  conducted  merely  in 
their  interest  as  cestuis  que  trust.  In  the  one  case  shareholders 
are  liable;  in  the  other,  they  are  not. 

§  77.  Nonliability  of  Cestui  Que  Trust  on  Contracts  of  Trustee 
— Continued. — Other  Massachusetts  cases  squarely  holding  that 
members  of  a  joint  stock  association  have  a  partnership  liability 

29phillips  v.   Blatchford,   supra. 

93 


§    77.]  NONLIABILITY   OF   CESTUIS.  [CHAP.    X. 

should  be  noted.  Thus  a  comparatively  early  case30  shows  a 
joint  stock  company  formed  under  a  constitution,  which,  among 
other  things,  provided  that  a  board  of  directors  should  attend  to 
the  mercantile  affairs.  It  was  said:  "The  directors  are  to  be 
regarded  as  the  agents  of  the  company  and  the  members  are 
bound  by  their  contracts  made  within  the  scope  of  their  author- 
ity. As  to  the  creditors,  each  member  is  liable  to  pay  all  the 
debts  of  the  company."  In  Taft  v.  Ward31  members  of  a  joint 
stock  company  organized  in  another  state  claimed  that  creditors 
must  sue  the  president  and  treasurer,  as  by  the  statute  of  its 
home  state  was  provided.  A  limited  liability  was  also  provided 
by  that  statute,  collectible  after  execution  against  the  company 
was  returned  unsatisfied.  It  was  held  that  the  provisions  were 
local  and  the  company  as  to  Massachusetts  contracts  was  a  mere 
partnership.  There  was  no  trust  or  trustee  provided  for  but  the 
"articles"  intrusted :  "The  sole  management  of  the  business, 
stock,  funds,  property  and  concerns  of  the  company  to  the  execu- 
tive committee,  etc."  The  defendants  sued  as  members  were 
held  liable  as  partners.  In  Edwards  v.  Warren  Linoline  &  Gaso- 
line Works32  it  was  attempted  to  sue  a  Pennsylvania  joint  stock 
company  as  such,  but  it  was  held  this  could  not  be  done,  and 
garnishment  process  based  thereon  was  held  invalid,  Taft  v. 
Ward,  supra,  and  other  Massachusetts  cases  being  cited.  The 
members  had  to  be  sued  as  partners  in  Massachusetts.  An  early 
case  in  which  the  opinion  was  by  Chief  Justice  Shaw33  is  very 
instructive.  A  joint  stock  association  was  formed  in  Massachu- 
setts in  1835  to  carry  on  the  lumber  business.  The  articles  pro- 
vided, among  other  things,  that :  "The  president  and  directors  are 
charged  with  the  general  management  of  the  interests  of  the 
company  *  *  *  and  the  agent  of  the  company  had  authority  to 
make  contracts  for  labor  and  services,  in  the  business  of  getting 
out  lumber  and  to  give  the  negotiable  promissory  note  of  the 
Company,  in  satisfaction  of  such  labor  and  services."  Holders 
of  shares  were  held  liable.  Here  it  is  seen  there  was  no  ques- 

30Tyrrell  v.  Washburn   (1863),  6  Allen  466. 
31(1871),  106  Mass.  518. 

32(1897),  168  Mass.  564,  47  N.  E.  502,  38  L.  R.  A.  791. 
33Tappan  v.  Bailey  (1842),  4  Mete.  (Mass.)  529. 
94 


CHAP.  X.]  NONLIABILITY  OF   CESTUIS.  [§    77. 

tion  of  trust  estate  at  all,  or  a  trustee  managing  same.  The 
case  is  useful  as  showing  the  validity  of  transferable  shares  in  a 
partnership.  In  a  case  decided  in  1904,34  there  is  discovered 
evolution  of  the  crude  arrangement  shown  in  Mayo  v.  Moritz, 
supra,  where  scrip  owners  were  denominated  cestuis  que  trust 
and  under  no  liability  for  debts  created  by  the  trustee.  The 
opinion  recites  an  agreement  establishing  an  association  "and 
appointing  three  trustees  to  conduct  the  business",  the  trus- 
tees to  hold  the  title  to  all  the  property  that  was  paid  in  or  ac- 
quired, and  to  manage  it,  subject  to  the  provisions  in  the  agree- 
ment, as  they  should  see  fit.  *  *  *  The  trust  could  be  ter- 
minated by  a  writing  signed  by  three  fourths  in  value  of  the 
shareholders.  *  *  *  *  Shares  of  $100  each,  taken  by  subscribers 
and  represented  by  certificates,  could  be  transferred.  *  *  *  *  Each 
shareholder  was  to  be  liable  for  the  amount  subscribed  by  him, 
but  he  was  not  to  be  liable  to  any  third  person,  nor  for  any 
amount  in  excess  of  his  subscription.  *  *  *  All  contracts  entered 
into  by  the  trustees  shall  be  in  their  names  as  trustees,  and 
shall  provide  against  any  personal  liability  on  the  part  of  the 
trustees  and  stipulate  that  no  other  property  shall  be  answer- 
able than  the  property  in  the  hands  of  the  trustees."  These 
provisions  in  this  agreement  differ  from  Smith  v.  Anderson 
and  Cox  v.  Hickman,  supra,  in  specifically  providing  for  free- 
dom from  personal  liability  by  trustees  and  cestuis  que  trust, 
but  such  freedom  was  declared,  as  resulting  as  a  matter  of  law 
so  far  as  the  latter  were  concerned,  and  it  must  be  thought  that 
the  trustees  under  the  Massachusetts  agreement  would  not  be 
released  from  personal  liability  except  by  stipulation.  In  Smith 
v.  Anderson  the  liability  of  cestuis  que  trust  as  investors  in 
securities  would  naturally  cut  so  little  figure  as  not  to  be  thought 
of,  while  in  Cox  v.  Hickman  one  of  the  Lords  Justices  said 
it  was  plain  that  no  personal  liability  on  the  part  of  creditors 
of  the  assignor  was  intended  to  be  incurred.  In  the  former  case 
there  was  an  effort  to  avoid  the  companies  act,  but  to  do  that 
the  partnership  relation  in  the  carrying  on  of  business  had  to 
be  eliminated.  This  Massachusetts  arrangement  is  for  a  part- 
nership arrangement  of  members  inter  sese  while  it  was  not, 
34Hussey  v.  Arnold,  185  Mass.  202,  70  N.  E.  87. 

95 


§    77.]  NONLIABILITY   OF   CESTUIS.  [CHAP.    X. 

if  the  English  scheme  was  not,  a  partnership  carrying  on  the 
business.  In  the  English  case  it  was  said  to  be  the  business  of 
the  trustees,  as  Taylor  v.  Davis  and  Wells-Stone  Mercantile  Co. 
v.  Grover  supra  similarly  say.  The  question,  however,  of  lia- 
bility of  shareholders  did  not  arise  in  Hussey  v.  Arnold  supra, 
but  a  trust  created  in  and  by  the  agreement  was  being  disposed 
of  by  a  court  of  equity,  and  its  property  was  held  sacred  from 
levy  under  a  common  law  writ  against  the  trustees  personally. 
The  opinion  says:  "The  trustees  held  the  legal  title  to  all  the 
property  and  they  alone  could  make  contracts.  Ordinarily,  in 
the  absence  of  special  limitations,  trustees  bind  themselves  per- 
sonally by  their  contracts  with  third  persons.  Actions  at  law 
upon  such  contracts  must  be  brought  against  them  and  judg- 
ments run  against  them  personally.  This  is  because  the  re- 
lations of  the  cestuis  que  trust  to  their  contracts  are  only  equit- 
able and  do  not  subject  them  to  proceedings  in  a  court  of  com- 
mon law,  and  the  property  held  in  trust  is  charged  with  equities, 
which  hold  it  aloof  from  the  jurisdiction  of  a  court  of  law  to 
take  it  and  apply  it  in  payment  of  debts  created  by  the  trustees. 
Such  debts,  if  proper  charges  upon  the  trust  estate,  can  be  paid 
from  it  under  the  authority  of  a  court  of  equity."  Then  the 
court,  stating  that  it  was  open  to  the  trustees  to  have  provided 
against  personal  liability,  further  said:  "If  they  did,  these  peti- 
tioners cannot  maintain  an  action  at  law35  against  anybody.  As 
agents  and  trustees  under  the  agreement  they  were  not  author- 
ized to  contract  any  debt  which  should  charge  the  certificate 
holders."  We  have  set  out  the  reasoning  in  this  case  quite  at 
length  to  show  that,  at  least,  these  trust  agreements  are  law- 
ful towards  the  establishment  of  a  trust  for  trading  purposes, 
that  contracts  under  them  may  be  made  only  by  trustees  to  af- 
fect the  property  constituting  the  trust,  and  that  the  share- 
holders merely  have  equitable  interests  in  the  trust  property. 
No  personal  liability  of  shareholders  was  involved  and  there 
is  nothing  opposed  to  the  ruling  in  Mayo  v.  Moritz  supra,  but 
on  the  contrary  the  reasoning  is  all  in  accord  with  that  ruling. 
Certainly  it  must  be  true,  that,  if  the  trustees  could  stipulate, 

35The  words  "action  at  law"  mean,   of  course,  as  distinguished 
from  a  suit  in  equity. 

96 


CHAP.    X.]  NONLIABILITY  OF  CESTUIS.  [§    77. 

as  the  court  said  expressly  they  could,  that  the  trust  property 
should  alone  be  bound,  in  release  of  their  own  liability,  a  fortiori 
should  this  be  a  release  of  shareholders,  who  bear  merely  an 
equitable  relation  to  the  business,  while  the  trustees  are  stipulat- 
ing against  an  ordinary  legal  liability.  Cases  from  other  courts 
will  be  considered  in  the  chapter  next  following. 


97 


CHAPTER  XL 

NONLIABILITY  OF  CESTUIS  QUE  TRUST  OF  A  TRADING  TRUST — 

CONTINUED. 

§  78.  Shareholders  in  a  Trading  Trust. — The  general  prin- 
ciple of  liability  of  a  trustee  is  thus  expressed  by  the  Illinois 
Supreme  Court:1  "The  decisions  are  uniform  that  a  guardian, 
executor,  administrator,  trustee  or  other  person  acting  in  such 
relation  binds  himself  personally,  unless  he  exacts  an  agreement 
from  the  person  with  whom  he  contracts  to  look  to  the  funds 
exclusively.  This  personal  liability  does  not  depend  upon 
whether  the  charge  would  be  a  proper  one  by  the  trustee  against 
the  fund  or  estate,  or  whether  he  should  be  allowed  reimburse- 
ment for  the  money  paid.  That  is  a  matter  wholly  between 
him  and  the  beneficiaries  of  the  trust."  This  case  expressly 
approves  Johnson  v.  Leman2  where  the  trust  seemed  to  be  an 
active  one,  and  in  which  case  the  suit  was  by  a  broker  against 
the  successor  of  a  deceased  trustee  upon  an  employment  to  se- 
cure a  loan  upon  the  trust  property.  This  loan  was  agreed  to 
be  made,  but  before  negotiations  were  completed  the  trustee 
died.  His  successor  obtained  the  needed  loan  from  another 
source.  Recovery  was  denied,  the  court  saying:  "The  general 
rule  is  that  expenses  of  properly  administering  a  trust  are  a 
lien  in  behalf  of  a  trustee,  on  the  estate  in  his  hands,  and  he 
will  not  be  compelled  to  part  with  his  control  of  that  estate 
until  such  expenses  are  paid.  But  this,  unless  it  may  be  in 
exceptional  cases,  does  not  extend  to  persons  employed  by  the 
trustee.  In  general  their  only  remedy  for  compensation  is  per- 
sonal against  the  trustee  employing  them."  While  the  sole  pur- 

IBradner  Smith  &  Co.  v.  Williams  (1899),  178  111.  420,  53  N. 
E.  358. 

2(1890),  131  111.  609,  23  N.  E.  435,  7  L.  R.  A.  656,  19  Am.  St. 
Rep.  63. 

98 


CHAP.   XI.]  NONLIABILITY  OF  CESTUIS.  [§   78. 

pose  of  this  suit  was  to  make  the  trust  estate  liable,  its  entire 
reasoning  is  on  the  theory  of  a  trustee  and  no  other  being 
personally  liable,  with  the  creditor,  under  certain  circumstances, 
having  a  right  to  resort  to  the  trust  estate.  The  opinion  says: 
"The  rule  can  work  no  great  hardship.  If  the  trustee  shall  be 
unable  to  procure  the  services  of  necessary  agents  upon  his  own 
responsibility,  let  him  apply  to  the  chancellor  for  permission  to 
charge  the  estate  especially  for  that  purpose."  Taylor  v.  Davis, 
so  frequently  hereinbefore  referred  to,  came  up  to  the  Federal 
Supreme  Court  from  Illinois,  and  is  one  of  the  notable  cases 
in  this  country  of  a  company  with  transferable  shares  and  the 
holders  thereof  cestuis  que  trust  in  a  business  conducted  under 
the  sole  management  and  control  of  trustees.  It  has  been  seen 
that  these  trustees  were  held  to  a  strict  personal  accountability 
for  their  contracts,  and  there  is  not  a  word  in  the  very  full  dis- 
cussion referring  in  the  remotest  way  to  any  personal  liability 
on  the  part  of  these  cestuis  for  their  contracts.  On  the  con- 
trary, Mr.  Justice  Woods  uses  the  established  principle,  that 
trustees  "have  no  authority  to  bind  ex  directo  the  persons  for 
whom  or  for  whose  benefit  or  for  whose  estate  they  act,"  as 
persuasive  to  the  conclusion,  that  the  trustees  in  this  trust,  em- 
barked in  trade,  with  a  joint  stock  company  behind  it,  were 
personally  liable,  thus  treating  the  shareholders  in  that  stock 
company  as  cestuis  que  trust  and  nothing  more.  All  of  which 
is  in  full  accord  with  the  specific  declarations  of  principles  ex- 
cerpted from  the  two  Illinois  cases  last  above  cited.  In  Penn- 
sylvania the  status  of  shareholders  in  a  joint  stock  company  to 
property  in  a  trust  embarked  in  trade  has  been  very  accurately 
defined.3  In  this  case  an  unincorporated  joint  stock  company 
was  formed  for  buying  and  selling  mineral  lands.  Its  articles 
provided  for  title  to  all  property  vesting  in  trustees,  and  the 
interest  of  each  member  was  to  be  measured  by  his  shares  of 
stock.  It  was  said :  "The  partnership  thus  formed,  whatever 
the  liability  of  members  to  third  persons  may  be,  is  an  ar- 
tificial person  capable  of  acquiring,  holding  and  selling  property. 
*  *  *  The  relation  of  stockholders  to  the  company  is  also  settled 

SOliver's   Estate   (1890),  136  Pa.  43,  20  Atl.  527,  9  L.  R.  A.  421, 
20  Am.  St.  Rep.  894. 

99 


§   78.]  NONLIABILITY  OF  CESTUIS.  [CHAP.    XI. 

largely  by  the  articles  of  agreement.  They  contribute  the  capital, 
select  the  trustees  who  are  to  use  and  invest  it,  and  are  entitled 
to  a  distributive  share  of  the  profits  made  in  the  business.  As 
between  themselves,  however — it  may  be  as  to  others,  they  are 
liable  for  losses  in  proportion  to  their  stock."  Thus  it  is  seen, 
that  whether  shareholders  as  cestuis  que  trust  are  liable  to  third 
persons  or  not  makes  no  difference  as  to  a  joint  stock  company 
being  a  partnership.  It  is  such  whether  there  is  or  is  not  the 
usual  feature  existing  in  partnerships  of  joint  and  several  li- 
ability on  all  contracts  in  its  behalf.  In  other  words,  share- 
holders in  a  joint  stock  company,  unincorporated,  may  be  cestuis 
que  trust  with  freedom  from  liability  just  as  other  individuals 
may  be  such  cestuis  que  trust.  That  a  definable  interest  in  a 
trust  estate  created  for  business  purposes  may  rest  on  stock 
ownership  in  an  unincorporated  association  is  also  declared  in 
a  recent  Pennsylvania  case.4  A  still  later  case  from  this  State5 
may  be  here  again  referred  to,  as  showing  that  a  trading  trust 
may  be  created  so  that  the  business  may  be  carried  on  as  that 
of  the  trustees  "as  if  they  were  the  absolute  owners  thereof." 
If  this  be  true,  it  is  immaterial  whether  cestuis  que  trust  be  in- 
dividuals, corporations  or  the  shareholders  of  an  unincorporated 
association,  or  whether  they  be  adults  or  infants.  There  is  a 
very  instructive  decision  in  an  early  New  York  case.6  This  case 
was  decided  in  1850  by  Duer,  Mason  and  Campbell,  JJ.,  and 
shows  that  the  vendees  of  a  tract  of  land  formed  an  association, 
with  articles  dividing  their  interest  into  transferable  shares. 
They  appointed  directors  to  manage,  improve  and  dispose  of  the 
land.  On  the  same  day  the  articles  were  signed  they  conveyed 
the  property  to  trustees,  the  deed  to  them  incorporating  the 
articles  of  association.  Yet,  notwithstanding  the  power  given 
to  such  directors,  it  was  held  that  by  the  deed  to  the  trustees 
the  shareholders  and  directors  had  no  power  or  authority  over 
the  land.  Therefore  an  alleged  dedication  by  said  directors  was 
held  to  be  wholly  void.  To  avoid  this  difficulty  it  was  claimed 

*Pittsburg  Wagon   Works'   Estate    (1903),   204   Pa.   432,   54   AtL 
316. 

BPrinz  v.  Lucas  (1905),  210  Pa.  620,  60  Atl.  309. 
«Ward  v.  Davis,  3  Sandf.  (Super.  Court)  502. 
100 


CHAP.   XI.]  NONLIABILITY  OF   CESTUIS.  [§    78. 

that:  "The  trust  deed  effected  only  a  technical  alteration  of  the 
title,  and  the  powers  of  the  trustees  were  purely  nominal."  But 
the  court  quoted  the  following  clause:  "They  are  directed  to 
sell  and  dispose  of  the  lands  conveyed  at  such  time  and  times 
and  in  such  manner,  either  at  public  or  private  sale,  in  such 
parts  or  portions  and  for  such  prices  as  to  them  or  any  two 
of  them  might  seem  most  expedient."  Then  the  court  said : 
"If  this  discretionary  power  of  sale  was  valid  at  all,  it  ren- 
dered it  impossible  for  the  directors,  collectively  or  individually, 
by  any  act,  resolution  or  representation  to  withdraw  from  the 
exercise  of  the  power  any  portion  of  the  land  which  it  em- 
braced. *****  Hence  the  clauses  which  have  been  cited 
from  the  trust  deed  must  be  either  wholly  expunged  or  the  ar- 
ticles of  association  must  be  construed  to  mean  that  the  powers 
which  they  give  to  the  directors  shall  be  exercised  in  subordina- 
tion to  those  that  the  deed  gives  to  the  trustees."  In  this  case 
many  persons  had  purchased  tracts  upon  the  faith  of  a  resolu- 
tion by  the  directors  dedicating  a  strip  of  land  in  front,  which 
dedication  would  have  been  recognized  but  for  the  existence  of 
the  deed  of  trust.  It  is,  therefore,  thought,  that  no  stronger 
case  than  this  may  possibly  be  produced  to  show,  that  trus- 
tees are  not  agents,  because  their  discretionary  powers  absolutely 
overrode  express  powers  granted  to  officers  of  this  unincor- 
porated association.  Therefore  it  could  not  have  been  claimed 
in  this  case  that  the  shareholders  in  this  association  were  bound 
by  their  acts,  when  as  the  court  said:  "The  shareholders  and 
directors  had  no  power  or  authority  over  the  land." 

The  severity  of  the  principle  of  trustee  liability  and  no  other 
is  also  strongly  illustrated  in  a  Rhode  Island  case,7  where  trus- 
tees indorsed  notes,  as  required  in  business  exigencies  by  the 
will  creating  the  trust,  of  which  requirement  the  indorsee  was 
aware.  Counsel  claimed  that  this  would  be  "to  punish  them  for 
the  faithful  observance,  within  thz  limits  of  their  powers,  of 
the  trust  imposed  upon  them,  well  known  to  the  indorsee". 
The  court  said:  "The  situation  of  the  trustees,  if  the  trust 

TRoger  Williams  Nat'I.  Bank  v.   Groton  Mfg.  Co.   (1889),  16  R. 
I.  504,  17  Atl.  170. 

101 


§    79.]  NONLIABILITY  OF  CESTUIS.  [CHAP.   XI. 

estate  be  insufficient  to  indemnify  them  fully  for  the  debts  which 
they  have  contracted,  is  indeed  hard,  but  it  is  one  in  which 
they  have  voluntarily  placed  themselves,  and  though  we  may 
sympathize  with  them,  we  cannot  on  that  account  relax  the  rules 
of  law  in  their  behalf." 

§  79.  Shareholders  in  a  Trading  Trust — Continued. — In 
Clagget  v.  Kilbourne,8  the  Supreme  Court  held  distinctly  that 
a  joint  stock  company  formed  for  the  purpose  of  buying  and 
selling  lands  is  a  partnership,  but  this  holding  instead  of  militat- 
ing against  the  conclusion,  that  the  court  should  treat  the  prop- 
erty, the  legal  title  to  which  was  in  legal  trustees,  as  partner- 
ship property,  caused  the  court  to  say  that:  "In  this  case  the 
legal  title  is  in  the  trustees,  who  are  bound  to  account  to  the 
stockholders,  the  cestuis  que  trust  according  to  their  respective 
shares,  after  all  debts  of  the  association  have  been  discharged." 
It  was  not  necessary  for  the  court  to  have  added  the  last 
clause,  and  it  is  doubted  whether  this  dictum  is  true,  but,  be  it 
true  or  not,  it  in  no  way  declares  that  a  debt  by  the  trustees 
is  a  debt  of  the  association,  and  it  could  not  be  thus  interpreted 
and  be  in  harmony  with  Taylor  v.  Davis,  supra,  which  also 
showed  a  joint  stock  company  back  of  the  trustees.  If  it  is  true, 
it  would  merely  affect  the  right  of  a  shareholder  to  sue  a  trus- 
tee or  the  right  of  a  creditor  of  a  shareholder  to  proceed  as  to 
the  shareholder's  interest  in  the  trust  property,  subjects  herein- 
after to  be  treated.  In  1906  this  court  considered  the  status 
of  a  share  of  a  joint  stock  company  as  security  to  a  National 
Bank  and  the  right  of  such  a  bank  to  become  the  owner  there- 
of.9 In  that  case,  however,  there  was  merely  the  general  ques- 
tion presented  of  partnership  liability  attaching  to  ownership 
of  shares  in  an  unincorporated  joint  stock  association.  The 
facts,  as  gathered  from  the  case,  and  as  it  was  decided  by 
Supreme  Court  of  Ohio10  show  that  trustees  held  title  to  land 
in  a  syndicate  agreement,  with  interest  represented  by  trans- 
ferable shares  in  an  unincorporated  association,  and  certain 

8(1861),  66  U.  S.   (Black)  346. 

^Merchants'  National  Bank  v.  Wehrman,  202  U.  S.  295. 
lOSame  case   (1903),  69  Oh.  St.  160. 
102 


CHAP.    XI.]  NONLIABILITY    OF   CESTUIS.  [§    79. 

powers  were  granted  to  them,  namely  platting  the  property, 
and  leasing  and  selling  it,  paying  the  purchase  money  and  the 
ground  rents,  and  to  pay  the  balance  to  the  holders  of  certificates. 
But  officers  of  the  company  appear  to  have  made  contracts  for 
street  improvements  and  to  have  managed  its  business  and  it 
seems  to  have  been  through  by-laws  and  not  by  provisions  in 
the  deed  to  the  trustees  that  their  powers  were  defined.  There- 
fore, they  were  agents  and  not  trustees,  though  called  trustees, 
as  was  well  said  by  Brett,  L.  J.,  in  Smith  v.  Anderson,  supra. 
The  State  and  Federal  Supreme  Courts  both  speak  of  the  as- 
sociation, not  the  trustees,  incurring  the  indebtedness.  The 
trustees  in  this  case  seemed  little  more  than  holders  of  title. 
The  ruling  in  this  case  was  that  a  share  in  a  joint  stock  com- 
pany could  not  be  acquired  by  a  National  Bank,  so  as  to  make 
the  bank  a  partner,  but  the  bank's  title  was  not  declared  to  be 
absolutely  void.  The  latter  question  was  not  involved.  The 
rulings  by  both  courts  in  this  case  merely  emphasized  the  prin- 
ciple of  partnership  liability  in  the  ownership  of  a  share  in 
an  unincorporated  joint  stock  association,  but  do  not  at  all 
touch  the  question  of  liability  over  for  the  contracts  of  trustees 
having  as  expressed  in  Prinz  v.  Lucas,  supra,  control  of  prop- 
erty, "as  if  they  were  absolute  owners  thereof."  In  a  Kansas 
case11  there  were  joint  adventurers  in  a  land  purchase  for 
purpose  of  speculation.  This  was  declared  a  partnership. 
Title  to  the  property  was  taken  in  the  name  of  one  of  them, 
who  was  not  even  designated  trustee.  He  and  his  wife  gave 
a  mortgage  for  balance  of  purchase  money.  The  joint  ad- 
venturers controlled  the  enterprise,  severally  contributing  to 
purchase  of  land  and  the  payment  of  taxes  and  other  expenses. 
It  was  urged  they  were  merely  cestuis  que  trust,  but  the  court 
said:  "The  mere  fact  that  the  title  was  taken  in  the  name  of 
one  of  the  parties,  who  executed  a  mortgage  for  the  unpaid 
purchase  money,  cannot  change  the  relationship  of  the  parties  or 
the  ownership  of  the  property,  as  he  was  no  more  than  a  trustee 
holding  the  title  for  the  convenience  and  benefit  of  all  interested 
parties."  Here  the  trustee,  if  he  was  such,  was  under  the  con- 
Clones  v.  Davies  (1899),  60  Kan.  309,  56  Pac.  484,  72  Am.  St. 
Rep.  354. 

103 


§   80.]  LIABILITY  OF   SHAREHOLDERS.  [CHAP.   XI. 

trol  of  the  association  and  the  members  were  maintaining  the 
business,  of  which  one  was  the  mere  figure  head.  To  him  no 
control  was  surrendered  and,  had  he  repudiated  their  control, 
equity  would  have  afforded  relief.  With  a  trustee  given  by  an 
instrument  creating  a  trust  full  control  the  case  is  vastly  dif- 
ferent. 

§  80.  Liability  in  General  Aspect  of  Shareholders  in  Unin- 
corporated Associations. — Among  the  early  noted  decisions  in 
New  York  is  that  of  Warner  v.  Beers,12  decided  in  1840  by 
New  York  Court  for  the  Correction  of  Errors.  There  Senator 
Verplanck  at  page  145  speaks  of  powers  essential  to  the  being 
of  a  corporation  and  powers  which  are  merely  accessory ;  the 
latter  of  which  "may  be  enjoyed  by  unincorporated  associa- 
tions." Speaking  of  the  latter  he  says:  "Such  a  power  is  the 
transferability  of  shares,  whereby  investments  may  be  made  with- 
out the  owner  losing  future  control  of  his  funds  under  change 
of  circumstances.  Such  too  is  the  limitated  responsibility  by 
which  the  stockholder,  having  once  fairly  paid  up  his  share  of 
the  capital,  is  exempted  from  further  personal  liability.  So  too 
the  convenience  of  holding  real  estate  for  the  common  purposes 
exempt  from  the  legal  inconveniences  of  joint  tenancy  in  com- 
mon. Again :  There  is  the  continuance  of  the  joint  property 
for  the  benefit  and  preservation  of  the  common  fund,  indissoluble 
by  the  death  or  legal  disability  of  any  partner."  Again  on  page 
149  he  said  as  to  transferability  of  shares:  "This  transfer- 
ability  may  be  formed  in  many  sorts  of  trusts,"  and  he  cites 
the  "Tontine  of  New  York,"  "originally  settled  by  the  most 
eminent  counsel  of  this  State,  and  its  validity  attested  by  nearly 
fifty  years'  experience"  and  never  impeached  though  its  shares 
"have  passed  through  courts,  insolvencies,  bankruptcy  commis- 
sions and  distribution  of  estates."  The  articles  of  the  Tontine 
date  from  1793.  On  page  150  the  Senator  spoke  of  exemption 
from  personal  liability  as  being  the  "most  familiar  distinction 
in  the  general  and  popular  understanding"  between  corpora- 
tions and  partnerships,  and  then  he  argued  that  it  is  settled 
law  that:  "When  a  creditor  has  notice  that  by  an  arrange- 

1223  Wend.  103-190. 
104 


CHAP.    XI.]  SUMMARY.  [§    81. 

ment  between  partners,  one  of  them,  though  appearing  to  the 
world  as  a  partner,  shall  not  participate  in  the  loss,  and  shall 
not  be  liable  for  it,  the  creditors  will  be  bound  by  the  arrange- 
ment." On  page  151  he  makes  this  very  significant  statement: 
"The  original  articles  of  the  Merchant's  Bank,13  in  the  City  of 
New  York,  as  an  unincorporated  association,  with  limited  li- 
ability, as  well  as  transferable  shares,  which  were  read  in  argu- 
ment (in  this  case)  have  the  great  professional  authority  of 
Alexander  Hamilton,  who  prepared  them,  and  of  the  eminent 
men  who  joined  in  them  and  whose  professional  distinction  gives 
to  their  approbation  the  character  of  a  sort  of  judicial  sanc- 
tion; whilst  the  restraining  act  passed  soon  after  proves,  as 
was  unanswerably  argued,  that  the  legislature  and  its  legal  ad- 
visers considered  such  a  voluntary  association,  thus  restraining 
its  own  liability,  not  as  a  violation  of  common  law  or  natural 
right,  but  merely  as  contradicting  the  financial  policy  of  the 
state."  Of  course,  this  action  by  the  legislature  was  taken 
by  virtue  of  the  State's  police  power  over  the  business  of  bank- 
ing. If,  then,  notice  that  one  is  a  trustee,  and  not  an  agent, 
is  by  any  possibility  not  sufficient  that  a  cestui  que  trust,  be  he 
such  as  a  shareholder  in  an  unincorporated  association  or  an 
individual,  minor  or  adult,  is  not  to  be  held  liable  for  a  trus- 
tee's contracts,  yet,  if  the  articles  of  an  association  are  brought 
home  to  parties  dealing  with  the  trustee  and  they  provide  exemp- 
tion from  personal  liability  of  a  cestui  que  trust,  settled  law 
must  be  overturned  to  make  him  liable. 

§  81.  Summary. — In  this  and  the  next  preceding  chapter  it 
has  been  attempted  concretely  to  show  what  has  been  fore- 
shadowed in  all  that  has  preceded  them  as  a  necessary  ingredient 
to  the  association  of  shareholders  in  a  business  enterprise,  who 
by  force  of  their  common  law  rights,  may  acquire  the  same 
interest  in  that  enterprise  as  a  stockholder  in  the  assets  of 
a  corporation  and  the  same  personal  immunity  from  its  acts  and 
contracts.  The  cases  cited  and  quoted  from  in  these  chapters 
either  rule  these  propositions  directly  or  supply  the  major  prem- 
ise from  which  they  necessarily  flow.  Indeed,  it  may  be  well 

ISThese  articles  are  set  forth  in  the  back  of  this  book. 

105 


§    81.]  SUMMARY.  [CHAP.    XI. 

thought,  that  the  latter  is  so  evident,  that  rarely  has  it  been  at- 
tempted to  contend  that  any  cestui  que  trust  is  a  mere  principal 
of  a  trustee.  The  mere  statement  of  such  a  proposition  involves 
a  contradiction  in  terms,  or  at  least,  is  opposed  to  all  theory 
upon  which  equitable  jurisdiction  has  attached  in  favor  of  bene- 
ficiaries in  property  to  which  they  have  no  legal  title.  This  is 
as  thoroughly  established  as  that  a  bailor  may  be  entitled  to 
compensation  for  a  bailment,  or  a  lessor  rent  for  his  tenement, 
and  neither  be  liable  for  the  contracts  of  the  bailee  or  a  tenant 
as  such.  That  the  relation  of  principal  and  agent  does  not  ap- 
ply as  to  a  trustee  of  a  trust  in  equity  and  that  such  a  trust 
may  be  embarked  in  trade,  appear  thoroughly  shown,  and  also 
that  the  cestuis'  interests  may  be  evidenced  by  transferable 
shares.  It  also  has  been  shown  that  the  trustees  of  a  trust  in 
business  can  employ,  as  occasion  may  require,  every  power 
granted  by  the  instrument  creating  the  trust  and  that  articles  of 
association  for  the  formation  of  a  business  enterprise  are  sub- 
ordinate to  the  powers  thus  granted,  if  any  conflict  exists. 

It  is  reserved  for  a  succeeding  chapter14  to  consider  the  cestuis' 
obligations  on  their  unpaid  subscriptions  as  being  assets  of  the 
trust  estate. 


^Chapter  XVIII  post. 
106 


CHAPTER  XII. 
RELATION  OF  SHAREHOLDER  TO  TRUSTEE. 

§  82.  Preliminary. — We  have  endeavored  to  show  that  the 
quality  or  character  of  a  beneficiary  in  a  trust  has  no  relation 
whatever  to  the  question  of  his  being  personally  liable  for  the 
acts  and  contracts  of  the  trustee.  A  beneficiary  appears  to  be 
bound,  if  one  designated  as  trustee  is  under  his  control,  for 
then  he  is  but  an  agent,  by  whatsoever  name  he  may  be  called. 
If  with  the  legal  title  there  is  committed  as  full  control  to  the 
trustee,  as  if  he  also  possessed  the  beneficial  interest,  the  cases 
cited,  quoted  from  and  discussed  demonstrate,  that  all  contracts 
by  him  are  his  contracts  and  without  any  exemption  of  personal 
liability  therefrom,  unless  he  stipulates  expressly  therefor.  Sup- 
posing, therefore,  that  certificate  or  share  holders  in  the  prop- 
erty of  a  trust  embarked  in  business  are  not  liable  as  cestuis 
que  trust  for  the  acts  and  contracts  of  its  trustees,  it  is  material 
to  inquire,  whether  from  any  other  aspect  such  holders  may 
be  partners  inter  sese  or  with  respect  to  the  trustees  or  other- 
wise. 

§  83.  Are  Shareholders  Partners  Inter  Sesef — In  Smith  v. 
Anderson1  an  association,  whose  membership  was  determined 
by  the  ownership  of  shares,  with  the  business  for  which  it  was 
formed  to  be  carried  on  by  trustees,  was  assailed  as  being  il- 
legal under  the  English  Companies  Act,  which  forbade  the 
formation  of  a  partnership  "for  the  purpose  of  carrying  on  any 
business,  etc."  where  it  consisted  of  more  than  twenty  persons, 
unless  there  was  registration  required  by  the  act.  Brett,  L.  J., 
said :  "I  should  hesitate  to  say,  that  by  the  ingenuity  of  men 
of  business,  there  might  not  some  day  be  formed  a  relation 
among  twenty  persons,  which,  without  being  strictly  a  com- 

1(1880),  15  L.  R.  Ch.  Div.  247. 

107 


§   83.]  RELATION   OF  CESTUIS  TO   EACH   OTHER.  [CHAP.    XII. 

pany  or  partnership,  might  yet  be  an  association,"  and  at  all 
events  he  thought  the  association,  whether  it  be  a  partnership 
or  not,  did  not  come  under  the  act,  because  it  was  not  formed 
"for  the  purpose  of  carrying  on  business." 

•  James,  L.  J.,  dwells  also  on  the  fact  that  the  business  was  to 
be  carried  on  by  the  trustees  and  then  says :  "I  cannot  find  that 
this  deed  constitutes  any  association  whatever  between  the  per- 
sons who  are  supposed  to  be  socii.  One  man  goes  with  £90 
in  his  hands  and  buys  from  the  trustees  a  £100  certificate  with 
all  the  chances  of  profit  attaching  to  it.  Another  man  goes  the 
next  day  and  takes  his  £90  to  the  same  people  and  gets  from 
them  another  certificate,  by  which  he  gets  a  right  to  share  in 
the  funds  in  their  hands.  The  first  man  knows  nothing  of 
the  second,  and  the  second  knows  nothing  of  the  first,  they  have 
never  come  to  any  arrangement  whatever  as  between  themselves. 
There  has  never  been  anything  creating  mutual  rights,  or  ob- 
ligations between  those  persons."  These  views  are  seen  to 
assimilate  shareholding  in  a  trust  to  that  in  corporate  capital, 
to  regard  the  trust  as  distinctly  a  separate  entity  as  is  corporate 
capital,  in  short,  to  make  both  stand  on  the  same  footing,  with 
abuse  in  management  of  the  one  subject  to  the  same  intervention 
on  the  part  of  courts,  at  the  instance  of  shareholders  as  the 
other,  though  possibly  under  statutes  the  manner  of  procedure 
might  differ.  Thus  applying  the  English  principle  it  might  be 
said  the  partnership  idea  disappears  and  nothing  more  stands 
between  the  cestuis  que  trust,  represented  by  a  certificate,  and 
the  trustee,  than  is  between  a  stockholder  in  a  corporation  and 
its  board  of  directors. 

In  one  of  the  Corporation  Tax  Cases,2  wherein  it  was  held 
that  a  trust  in  real  estate,  whose  beneficiaries  were  shareholders, 
was  not  subject  to  such  tax,  the  record  shows  that  the  prop- 
erty constituting  the  trust  was  originally  owned  in  fee  simple 
by  tenants  in  common.  They  conveyed  it  to  trustees  in  con- 
sideration of  the  issuance  of  certificates  as  evidence  of  their 
former  interests,  respectively,  in  the  property.  Distinguished 
counsel  for  one  of  the  certificate  holders,  claiming  the  trust  estate 

2Eliot  v.  Freeman  (1911),  220  U.  S.  178. 
108 


CHAP.   XII.]  RELATION   OF    CESTUIS  TO   EACH    OTHER.  [§    83. 

was  not  subject  to  the  tax,  use  in  their  brief  the  following  lan- 
guage very  pertinent  to  the  position  endeavored  here  to  be 
made  clear:  "The  issue  of  certificates  of  shares  did  not  turn 
either  the  beneficiaries  or  the  trustees  into  an  association  or  a 
company.  If  there  had  been  no  such  certificates,  the  owners 
would  have  been  entitled  to  the  same  shares  in  the  beneficial 
interest  and  could  have  transferred  or  otherwise  dealt  with 
them.  The  certificates  provided  an  easy  means  of  making  the 
transfers  and  removed  any  occasion  for  otherwise  examining 
the  title  to  the  beneficial  interests.  If  there  had  been  no  cer- 
tificates issued  for  the  shares  of  the  owners  in  the  equitable 
interest,  nobody  would  have  dreamed  of  calling  the  trustees,  or 
the  beneficiaries,  or  both  together,  a  joint-stock  company  or  as- 
sociation." 

If  this  is  true,  why  also  is  it  not  true  as  said  by  James,  L.  J., 
supra,  that  there  is  no  association,  because  there  are  no  "socii" 
in  such  a  trust?  All  the  decisions  about  liability  of  joint-stock 
companies  and  voluntary  associations  were  where  they  control 
or  carry  on  business  and  not  where  a  number  of  individuals  have 
interests  as  beneficiaries  in  a  trust  estate.  How  that  interest 
appears  is  itself  a  question  for  a  court  of  equity,  for,  if  statute 
determine  this,  equity  would  merely  follow  the  law  in  recog- 
nizing what  it  declares. 

Of  the  two  trusts  involved  in  Eliot  v.  Freeman,  supra,  the 
other  was  formed  by  subscription  to  shares  just  as  m  Smith  v. 
Anderson,  supra,  and  in  one  opinion  the  Supreme  Court  treats 
them  both  as  trusts  and  not  as  joint-stock  companies  and  holds 
them  as  trusts  not  liable  to  the  corporation  tax. 

Eliot  v.  Freeman,  supra,  seems  particularly  appropriate  in  con- 
tradistinction with  another  one  of  the  Corporation  Tax  Cases,3 
decided  the  same  day.  In  this  latter  case,  a  syndicate,  a 
corporation,  was  held  not  liable  for  the  tax  because  it  had  so 
amended  its  articles  of  incorporation  that  its  sole  authority  was 
to  ho'ld  title  and  receive  and  distribute  rentals  and  the  pro- 

SZonne  v.  Minneapolis  Syndicate  (1911),  220  U.  S.  187. 

109 


§   84.]  RELATION  OF  CESTUIS  TO   EACH   OTHER.  [CHAP.   XII. 

ceeds  of  any  land  sold  among  its  stockholders.  This  was  said 
not  to  be  a  carrying  on  of  business.  The  trusts  above  spoken  of 
also  relied  upon  this  ground,  but  the  court  preferred  to  declare 
their  non-liability  upon  the  ground  above  indicated.  The  two 
decisions  show  unmistakably  that  it  makes  no  possible  difference 
in  what  way  interests  in  property  are  evidenced — whether  by 
the  instrument  of  trust  or  certificates  of  shares  thereunder.  In 
either  case  the  owners  may  be  cestuis  que  trust,  and  a  trust  estate 
exists  independently;  that  is,  it  is  a  legal  entity  separate  from 
them  just  as  a  corporation  is  a  legal  entity  separate  from  its 
shareholders. 

§  84.  The  Massachusetts  View. — That  the  figment  of  partner- 
ship merely  arising  out  of  the  manner  whereby  subscriptions  to 
shares  in  the  capital  of  a  trust  are  obtained,  does  not  entirely 
disappear,  reasonably  may  be  claimed,  for  some  purposes  at 
least,  seems  warranted  by  Massachusetts  decision.  Thus  in  a 
recent  case4  the  question  was  whether  certificate  holders  were 
taxable  at  their  residences  or  the  capital  or  property  of  a  trust 
was  taxable  where  it  carried  on  business.  The  court  said :  "The 
question  arises  from  the  fact  that  petitioners  are  trustees  of  an 
association  of  shareholders  in  an  enterprise  for  the  purchase, 
improvement  and  management  of  real  estate  for  gain.  If  their 
relation  to  the  certificate  holders  was  merely  that  of  trustees 
and  cestuis  que  trust,  the  interest  of  each  beneficiary  in  the 
trust  estate  would  be  taxable  in  the  city  or  town  of  his  resi- 
dence, if  within  the  Commonwealth  (citing  statute).  If  the 
certificate  holders  in  the  trust  are  partners  within  the  mean- 
ing of  section  twenty  seven  of  the  chapter  just  cited,  their 
property  was  all  taxable  in  the  City  of  Boston,  where  their 
business  was  carried  on."  This  section  provides  for  taxing  part- 
ners, wherever  they  may  reside,  under  their  firm  name  for  all 
personal  property  employed  in  the  business,  where  it  is  carried 
on.  If  there  are  two  or  more  places  where  the  business  is  car- 
ried on,  then  at  each  place  proportionately  according  to  the 
property  in  each  place.  The  court  then  proceeded  as  follows: 
"There  is  no  doubt  that  they  are  joint  owners  of  the  property 

4Williams  v.  Boston  (1911),  208  Mass.  497,  94  N.  E.  808. 
110 


CHAP.    XII.]  RELATION   OF   CESTUIS  TO   EACH   OTHER.  [§    84. 

for  whose  joint  benefit  the  business  is  carried  on,  in  which  profits 
or  loss  will  affect  them  all  proportionally  through  the  increase 
or  diminution  of  the  value  of  their  respective  interests  in  the 
trust.  There  is  a  provision  in  the  agreement  of  trust  that 
neither  they  nor  the  trustees  are  to  be  liable  personally  for  all 
the  debts  of  the  trust,  and  in  this  respect  their  relation  to  the 
business  is  like  that  which  appeared  in  Hussey  v.  Arnold,  185 
Mass.  202.  In  Gleason  v.  McKay,  134  Mass.  419  and  in  Phillips 
v.  Blatchford,  137  Mass.  510,  similar  trust  agreements  were 
held  to  create  partnerships.  We  do  not  think  the  provision 
exempting  the  certificate  holders  from  personal  liability  for  the 
debts  should  be  held  to  defeat  the  application  of  this  section  to 
the  trust  as  a  partnership.  The  decisions  already  made  hold 
that  the  transferable  quality  of  their  interests  and  other  pro- 
visions for  conducting  the  business,  similar  to  those  of  cor- 
porations, do  not  prevent  their  relation  from  being  that  of 
partners.  In  the  leading  and  substantive  features  that  distin- 
guish ordinary  partnerships,  this  association  is  within  the  spirit 
and  meaning  of  the  law  of  partnership.  The  limitations  upon 
the  power  and  liability  of  individual  members  and  the  attempt 
to  avail  themselves  of  many  of  the  privileges  of  stockholders 
in  corporations  relate  more  to  details  and  to  the  machinery  of 
management  than  to  the  substantive  purposes  of  the  enter- 
prise." 

So  far  the  court  appears  to  concede,  at  least  for  the  sake  of 
argument,  that  the  provision  of  exemption  from  personal  liabil- 
ity is  valid,  but  taxation  cannot  notice  such  a  detail,  and  this 
idea  is  enforced  by  what  the  court  next  says,  as  follows :  "There 
are  reasons  of  policy  why  the  members  should  be  held  as  part- 
ners within  the  meaning  of  this  section,  for  as  trusts  are  not 
regulated  by  statute,  and  no  returns  are  required  of  them,  in- 
terest in  them  held  by  non-residents  of  the  city  or  town  where 
their  business  is  conducted  would  be  liable  to  escape  taxation, 
unless  the  property  is  taxed  in  the  firm  name." 

It  is  also  suggested,  that  the  intent  of  this  exemption  from 
liability  is  the  creation  of  a  benefit  or  status  in  favor  of  the  cer- 
tificate holders  purely  in  regard  to  matters  of  the  trust.  What- 

111 


§    84.]  RELATION  OF   CESTUIS  TO   EACH   OTHER.  [CHAP.   XII. 

ever,  therefore,  may  be  the  relation  created  between  the  trustee 
and  the  certificate  holder,  even  making  it  that  of  trustee  and 
cestui  que  trust,  the  State  for  purposes  of  taxation  takes  no 
account  of  it,  because  it  may  interfere  with  its  policy. 

It  is  also  to  be  observed  that  it  is  conceded,  as  was  pointed 
out  supra?  that  in  the  cases  referred  to  there  was  no  exemp- 
tion from  personal  liability  and  it  might  have  been  stated,  that, 
by  the  provisions  of  the  articles  of  association  there  considered, 
the  business  was  conducted  by  the  associations,  this  feature  be- 
ing especially  adverted  to  in  a  later  case,6  also  considered  in 
Chapter  X  supra. 

In  another  case,7  decided  shortly  after  that  of  Williams  v. 
Boston,  supra,  and  in  which  the  opinion  was  also  written  b/ 
Knowlton,  C.  J.,  it  appears  that  a  railroad  owning  a  large  body 
of  land  in  Boston,  formerly  occupied  as  a  station,  made  a  deed 
to  trustees  who  were  to  issue  to  it  a  certain  number  of  shares 
of  a  nominal  par  value  of  $100  each,  and  the  interest  of  share- 
holders or  cestuis  que  trust  was  to  be  represented  by  these 
shares.  The  trustees  were  also  authorized  to  issue  additional 
shares  not  exceeding  a  certain  number  to  obtain  money  to  be 
used  in  conducting  the  enterprise  the  trust  wa's  formed  to 
manage.  This  enterprise  designed  the  trustees  to  have  control 
over  and  dispose  of  the  real  estate,  including  the  power  to  im- 
prove it  by  building  thereon,  to  issue  notes  and  bonds  by  mort- 
gaging the  property,  etc.  It  was  also  provided  that  the  trus- 
tees were  to  have  no  power  to  bind  the  shareholders  personally, 
nor  were  they  to  be  personally  liable  for  claims  or  debts  against 
the  trust.  The  court,  after  giving  several  reasons  why,  as  ultra 
vires  the  corporation,  the  deed  to  the  trustees  was  void,  further 
said:  "Moreover,  if  other  stock  is  issued  by  the  trustees  and 
other  parties  are  brought  into  the  enterprise  and  other  lands 
are  bought,  the  railroad  corporation  will  be  in  a  community  of 
interest  in  profits  and  losses,  and  in  all  the  activities  of  the  busi- 

5Chap.  X,  §  76. 

6Mayo  v.  Moritz  (1890),  151  Mass.  481,  24  N.  E.  1083. 
TWilliams  v.  Johnson  (1911),  208  Mass.  544,  95  N.  E.  90. 
112 


CHAP.   XII.]  RELATION   OF   CESTUIS  TO   EACH   OTHER.  [§    84. 

ness,  with  other  owners.  It  will  be  virtually,  if  not  technically, 
in  a  partnership  with  them.  It  is  familiar  law  that  a  corpora- 
tion cannot  enter  into  a  partnership." 

It  would  not  be  strictly  in  a  partnership  for  the  reason  stated 
by  James,  L.  J.,  in  Smith  v.  Anderson,  supra,  as  follows :  "Per- 
sons who  have  no  mutual  rights  and  obligations  do  not  accord- 
ing to  my  view,  constitute  an  association  because  they  happen  to 
have  a  common  interest  or  several  interests  in  something  which 
is  to  be  divided  among  them."  The  Massachusetts  court  well 
qualified  its  statement  that  the  corporation  would  be  in  a  partner- 
ship. 

The  court  further  says:  "Most  of  the  reasons  for  this  rule 
are  as  applicable  to  the  present  case  as  to  an  ordinary  partner- 
ship. ******  Through  the  trustees  who  represent  the  in- 
terests of  new  shareholders  as  well  as  of  those  of  the  creator 
of  the  trust,  the  rights  and  interests  of  the  railroad  corporation 
are  controlled  in  part  for  those  who  are  not  members  of  it  or 
peculiarly  interested  in  it."  Here,  then,  it  is  disclosed  that, 
merely  because  the  trustees  could  no  longer  look  with  an  eye 
single  to  the  interest  of  the  railroad  as  sole  beneficiary,  there 
was,  something  so  nearly  akin  to  the  partnership  idea,  so  far  as 
inhibition  on  a  corporation  being  in  a  partnership  was  con- 
cerned, that  the  scheme  was  condemned.  Exactly  for  the  same 
reason  might  a  corporation's  investment  in  the  stock  of  another 
corporation  be  condemned,  the  directors  of  that  other  corpora- 
tion being  obliged  to  consider  the  interests  of  other  stockholders, 
as  well  as  those  of  the  investing  corporation. 

These  cases  seem  in  no  way  to  negative  the  principle  im- 
pliedly  expressed  in  Smith  v.  Anderson,  supra,  that  where  the 
entire  business  is  carried  on  by  trustees,  there  is  a  direct  respon- 
sibility to  certificate  holders  as  cestuis  que  trust,  but,  on  the  con- 
trary, much  to  support  this  principle.  It  is  only,  as  seen,  for 
special  reasons  or  from  the  view  of  public  policy  that  such  cer- 
tificate holders  are  declared  to  be  "virtually,  if  not  technically,"" 
partners. 

113 


§    85.]  RIGHTS    OF   CESTUI    AGAINST    TRUSTEE.  [CHAP.    XII. 

§  85.  Rights  of  Cestuis  Que  Trust  Against  a  Trustee. — That 
the  courts  will  lend  their  aid  in  the  fullest  way  to  protect  the  in- 
terests of  a  cestui  que  trust,  when  for  any  reason  those  interests 
are  adversely,  or  even  where  there  is  reasonable  apprehension 
that  they  may  be  thus  affected,  ought  to  need  no  discussion  or 
citation  of  authority.  To  intimate  to  the  contrary  is  to  doubt, 
the  maxim  ubi  jus  ibi  remedium.  Any  misappropriation  of  prop- 
erty or  of  its  rents  and  profits,  and  in  general,  any  failure  to 
carry  out  the  terms  of  a  trust  give  a  right  of  action  in  behalf 
of  a  cestui  que  trust,  and  where  the  trustee's  acts  are  incon- 
sistent with  his  duties  to  the  trust,  'he  may,  at  the  instance  of 
the  cestuis  que  trust,  be  removed.  Even  the  existence  of  cir- 
cumstances which  tend  in  any  way  to  discourage  or  endanger 
a  fair  and  faithful  administration  of  the  trust  is  cause  for  re- 
moval. As  showing  how  jealous  is  the  law  on  this  subject  it 
has  been  said :  "The  power  of  a  court  of  equity  to  remove  a 
trustee  and  substitute  another  in  his  place,  is  incidental  to  its 
duty  to  see  that  trusts  are  properly  executed ;  and  may  be 
properly  exercised  whenever  such  a  state  of  mutual  ill-feeling, 
growing  out  of  his  behavior,  exists  between  the  trustees,  or  be- 
tween the  trustee  in  question  and  the  beneficiaries  that  his  con- 
tinuance in  office  would  be  detrimental  to  the  trust."8  In  some 
circumstances  a  cestui  que  trust  may  sue  his  trustee  at  law.  For 
example  when  an  amount  due  a  cestui  que  trust  is  established 
and  made  certain.9  If  there  is  an  express  promise  by  the  trus- 
tee to  pay  the  cestui  que  trust  a  certain  part  o.f  the  income  an 
action  at  law  will  lie  thereon.10  Dividends  may  be  sued  for  at 
law,11  and  where  a  trustee  has  in  his  hands  money  which  in 
equity  and  good  conscience  belongs  to  one,  an  action  at  law 
therefor  is  an  ample  and  complete  and,  therefore,  the  appropriate 

8May  v.  May  (1897),  167  U.  S.  310,  17  Sup.  Ct.  Rep.  824,  42 
L.  Ed.  179. 

9Joh'nson  v.  Johnson  (1876),  120  Mass.  465. 

lOHusted  v.  Stone  (1896),  69  Vt.  149,  37  Atl.  253;  Weston  v. 
Barker  (1815),  12  Johns  (N.  Y.)  276;  Bias  v.  Brunnell's  Executor 
(1840),  24  Wend.  9. 

"Harrison  v.  Belden  (1857),  26  Conn.  67. 

114 


CHAP.     XII.]  CESTUIS     AS     CERTIFICATE     HOLDERS.  [§     86. 

remedy.12  So  far  as  income  is  concerned  where  it  is  made  pay- 
able to  a  beneficiary  it  is  never  deemed  vested  in  the  trustee,  but 
"the  cestui  que  trust  takes  the  whole  legal  title  to  the  accrued 
income  at  the  moment  it  is  paid  over  to  him."13 

No  reason  is  perceived  why  a  wrongful  withholding  should 
compel  a  resort  to  equity,  instead  of  an  action  at  law,  to  com- 
pel its  payment.  It  goes  without  saying,  that  if  there  does  exist 
an  action  at  law  as  to  what  affects  only  one  of  a  number  of 
trustees,  the  others  need  not  be  joined.  The  judgment  being 
against  the  trustee  in  a  personal  capacity  the  trust  estate  is  not 
affected. 

The  rule  has  been  stated  by  a  well-known  author14  as  fol- 
lows: "If  the  share  of  one  of  the  several  cestuis  que  trust  in  a 
trust  fund  has  been  ascertained  and  set  apart — as  where  it  is 
a  moiety  or  other  aliquot  part  of  a  fund — a  suit  for  breach  of 
trust  may  be  maintained  against  the  trustee  by  the  persons  en- 
titled to  that  share  without  joining  the  other  cestuis  que  trust 
as  parties."  It  would  seem  to  follow,  that  the  same  could  ap- 
ply as  to  interest  or  income  accruing  in  favor  of  a  cestui  que 
trust.  Indeed  the  general  rule  that  the  income  of  the  trust  estate 
is  assignable  by  the  cestui  que  trust,  and  may  be  alienated  or 
charged  with  his  debts,  is  equivalent  to  saying  that  the  trustee 
withholding  same  after  it  has  accrued  is  subject  to  suit  there- 
for.15 But  such  rights  and  liability  necessarily  imply  that  they 
attach  as  to  each  of  several  cestuis  que  trust  and  not  to  them  as 
a  whole. 

§  86.  Cestuis  Que  Trust  Represented  by  Certificates  of  Shares. 
— There  seems  never  to  have  been  any  question  raised  as  to 
interests  in  a  trust  estate  being  made  dependent  on  the  owner- 
ship of  shares  as  provided  by  the  instrument  creating  the  trust. 
No  one  has  ever  appeared  to  have  the  hardihood  to  suggest 

12Crocker  v.  Rogers  (1870),  58  Me.  339. 

ISBroadway   Nat'l.    Bank   v.    Adams    (1882),    133    Mass.    170,   43 
Am.  Rep.  504. 

l^Hill  on   Trustees   *  519   citing  authorities. 

152   Beach   on   Trusts   and  Trustees,   Sees.   712,   713,   715. 

115 


§     86.]  CESTUIS    AS    CERTIFICATE     HOLDERS.  [CHAP.     XII. 

anything  to  the  contrary.  The  trustee  accepts  the  title  and  the 
trust  in  recognition  of  beneficiaries  so  identified  and  the  creators 
of  the  trust,  reserving  to  themselves  the  entire  equitable  estate, 
contract  inter  sese  what  shall  be  evidence  of  its  aliquot  parts, 
or  rather,  to  speak  more  accurately,  evidence  of  the  original 
and  subsequent  vesting  of  prescribed  interests  in  such  equitable 
estate  and  how  transfer  of  such  interests  may  be  effected. 

Therefore  it  follows,  that  each  certificate  holder,  being  a 
cestui  que  trust  in  a  business,  "  in  which,"  as  said  in  Williams 
v.  Boston,  supra,  "profits  and  loss  will  affect  them  all  pro- 
portionally through  the  increase  or  diminution  of  their  respec- 
tive interests  in  the  trusts,"  must  have  the  right  to  proceed  sev- 
erally as  any  other  cestuis  que  trust  may,  unless  there  is  a  part- 
nership or  association,  which  gives  it  the  right  alone  to  receive 
from  and  receipt  to  the  trustee  for  the  income. 

The  nature  of  property  which  is  evidenced  by  transferable 
certificates  of  shares  in  real  estate,  the  title  to  which  is  vested 
in  trustees,  where  the  business  carried  on  by  them  was  speculat- 
ing in  lands,  is  thus  declared  in  a  Pennsylvania  case16  in  speak- 
ing of  a  particular  shareholder:  "The  interest  of  the  stock- 
holder in  the  company  property  is  controlled  by  his  relation  t"> 
the  company  under  his  agreement  and  by  the  nature  of  the  busi- 
ness done.  The  object  in  buying  was  not  to  mine  or  operate  in 
any  other  manner,  but  to  sell  again  so  as  to  make  gain  by  the 
purchase  and  sale  of  land,  and  the  articles  provided  for  the  divi- 
sion of  the  profits  made  by  such  purchase  and  sale  among  the 
stockholders.  The  interest  of  each  member  was  therefore  an 
interest  in  the  profits  made.  He  had  no  title  to  the  land  bought 
by  the  trustees  for  the  Company,  as  a  tenant  in  common  or 
otherwise  and  could  neither  convey  nor  encumber  it.  His  in- 
terest in  it  was  personal  estate  and  the  extent  of  that  interest 
was  shown  by  his  certificates  of  stock."  If  each  certificate 
holder  is  the  owner  of  personal  property,  he,  of  course,  has  the 
exclusive  right  to  call  the  trustees  to  account  with  reference  to- 

16Estate  of  Oliver   (1890),  136   Pa.  43,  20  Atl.   527,  9   L.  R.  A. 
421,  20  Am.  St.  Rep.  894. 
116 


CHAP.     XII.]  CESTUIS    AS    CERTIFICATE     HOLDERS.  [§     86. 

his  interest,  or  to  join  with  other  certificate  holders  in  seeking 
an  accounting  not  affecting  remaining  certificate  holders. 

Even  though  for  some  purposes,  as  for  example  taxation  as 
pointed  out,17  or  in  the  spirit  of  the  rule  against  a  corporation 
going  into  a  partnership,18  a  voluntary  association  formed  mere- 
ly as  an  incident  in  the  creation  of  a  business  trust  may  be 
deemed  a  partnership,  yet,  if  it  is  not  designated  itself  to  carry 
on  any  business  and  no  one  holds  himself  out  or  is  authorized 
to  hold  himself  out  as  capable  of  contracting  for  the  association, 
is  there  a  partnership?  Even  in  voluntary  joint  stock  associa- 
tions carrying  on  a  business  it  is  not  every  member  that  can 
bind  the  others  as  partners.  It  is  only  in  "an  ordinary  part- 
nership, unless  special  provision  is  made  in  that  behalf,  each 
partner  may  act  authentically  in  the  business  of  the  company  and 
bind  the  company  thereby."19 

Thus  it  has  been  stated  by  a  text  writer  in  speaking  of  un- 
incorporated joint  stock  associations:  "If  the  concern  is  com- 
posed of  numerous  members,  and  is  governed  by  managers  there 
is  no  implied  power  in  the  other  members  to  act."20  In  a  Texas 
case  it  was  attempted  to  hold  the  members  of  a  joint  stock  as- 
sociation as  partners  for  money  advanced  by  a  bank  upon  the 
order  of  the  association's  manager  without  authority  of  its  di- 
rectors, and  they  were  held  not  liable,21  the  court  saying  that 
it  was  expressly  provided  by  the  articles  of  which  the  bank  had 
notice  that:  "The  board  of  directors  alone  shall  have  power  to 
contract  debts  against  the  concern." 

In  17  Am.  &  Eng.  Encyc.  of  Law,  p.  G38,  it  is  said :  "Although 
a  joint  stock  company  is  a  partnership,  it  is  a  partnership  of  a 
different  description,  and  attended  with  different  incidents  and 
liabilities,  from  a  partnership  constituted  between  a  few  in- 

ITWilliams  v.   Boston,  supra. 

ISWilliams  v.  Johnson,  supra. 

lOWalker  v.  Wait  (1878),  50  Vt.  668. 

20  i  Bates  on  Partnership  C.  Ill  Sec.  72. 

2lWilliam   Cameron   &   Co.  v.   First   Nat'l.   Bank   (1893),  4  Tex. 
Civ.  App.  309,  23  S.  W.  334. 

117 


§  87.]     TRUSTEE'S  RESPONSIBILITY    TO  ASSOCIATION.     [CHAP.  xn. 

dividuals  who  carry  on  business  jointly,  with  equal  powers  and 
without  transferable  shares.  All  who  have  dealings  with  a  joint 
stock  company  know  that  the  authority  to  manage  the  business 
is  conferred  upon  the  directors,  and  that  a  shareholder,  as  sucn 
has  no  power  to  contract  for  the  company.  For  this  purpose  it 
is  wholly  immaterial  whether  the  company  is  incorporated  or 
unincorporated." 

If,  however,  it  has  no  business  to  be  managed,  but  its  mem- 
bers are  represented  as  cestuis  que  trust,  and  no  power  has 
been  conferred  on  any  officer  or  director  to  manage  any  busi- 
ness for  it,  then  by  the  instrument  establishing  the  trust  and 
the  trustees'  acceptance  thereof  and  action  thereunder  is  not  an 
immediate,  and  not  an  indirect,  relation  established  between  the 
shareholders  and  the  trustees?  The  moment  it  appears  that 
there  is  direct  responsibility  by  the  trustees  to  the  shareholders 
of  course,  the  general  principles  of  equity  in  favor  of  cestuis  que 
trust  become  operative. 

In  a  very  elaborate  opinion  by  the  Supreme  Court  of  Idaho22 
the  nature  of  voluntary  unincorporated  joint  stock  associations 
is  treated,  and  therein  it  was  held  that,  though  certain  officers  of 
such  an  association  entered  into  an  agreement  with  another,  it  did 
not  bind  the  shareholders,  as  partners,  because  power  therefor 
had  neither  been  given  nor  ratified,  in  a  word,  the  authority  of 
such  officers  was  construed  in  the  same  way  as  that  of  officers  of 
a  corporation.  Similarly  it  was  ruled  in  a  Texas  case.23 

§  87.  Theory  of  Trustee's  Responsibility  to  the  Association. — 
The  record  in  Clagett  v.  Kilbourne,24  frequently  hereinbefore  re- 
ferred to,  is  very  incomplete,  as  published,  but  the  court  there 
regarded  the  debts  created  through  the  acts  of  the  trustees  as 
acts  of  a  joint  stock  association,  whose  articles  gave  them  au- 
thority to  perform  certain  acts.  It  does  not  appear  whether 

22Spotswood  v.   Morris    (1906),  12  Idaho  360,  85   Pac.  1094,  6  L. 
R.  A.   (N.  S.)   665. 

23Willis  v.  Greiner  (1894)   (Tex.  Ct.  App.),  26  S.  W.  865. 
24(1861),  66  U.    S.    (Black),   346. 
118 


CHAP,  xii.]     TRUSTEE'S  RESPONSIBILITY  TO  ASSOCIATION.     [§  87. 

these  trustees  were  vested  or  not  with  full  discretion,  or  if 
they  were  under  the  control  of  the  association.  It  seems,  how- 
ever, they  performed  some  acts,  presumably  by  direction  or  con- 
sent of  the  stockholder,  for  which  express  power  by  the  articles 
was  not  granted.  At  all  events  an  association  was  called  a 
partnership  and  responsible  for  all  indebtedness  arising  out  of 
the  platting,  improving,  buying  and  selling  of  lands  for  which 
the  association  was  organized.  A  judgment  creditor  of  a  stock- 
holder levied  an  execution  upon  an  undivided  interest  corres- 
ponding to  his  debtor's  interest  in  the  property,  upon  particu- 
lar lots.  It  was  held  that  this  could  not  be  done,  as  the  debtor 
of  a  partner  could  only  levy  on  his  interest  in  the  partnership, 
and  what  that  was  could  only  be  ascertained  after  settlement  of 
partnership  liabilities. 

Still  viewing  the  association  as  a  partnership  and  the  trustees 
as  its  agents  the  court  said :  "In  this  case  the  legal  title  is  in  the 
trustees,  who  are  bound  to  account  to  the  stockholders,  the 
cestuis  que  trust,  according  to  their  respective  shares  after  all 
debts  of  the  association  have  been  discharged.  The  equity  of  the 
judgment  creditor  is  the  interest  in  the  land,  after  a  sufficient 
portion  of  it  has  been  disposed  of  for  this  purpose." 

This  case  is  not  like  a  case  of  trustees  managing  property 
producing  income  for  distribution  among  cestuis  que  trust,  but 
managing  property  in  which  a  surplus  was  to  be  distributed  after 
cost  of  purchase  and  expense  in  handling  should  be  refunded. 
This  surplus  was  to  be  profit  and  not  income  from  use,  and  in 
that  aspect  the  partnership  idea  cut  no  figure,  the  equity  of 
the  stockholders  being  the  same  whether  the  property  was 
handled  by  the  association  or  the  trustees.  Nevertheless  the  gen- 
eral principle  is  stated,  that  where  the  association  does  carry 
on  business  through  its  officers  or  agents  it  is  a  partnership, 
and  even  if  there  is  liability  by  a  trustee  directly  to  share- 
holders, it  is  only  after  the  association's  debts  are  paid.  But, 
if  the  association  does  not,  as  shown  by  Smith  v.  Anderson, 
supra,  carry  on  any  business,  then  it  contracts  no  debts  and  there 
is  nothing  to  come  between  a  trustee's  accounting  "to  the  stock- 

119 


§  88.]  SUMMARY.  [CHAP.  xn. 

holders,  the  cestuis  que  trust",  and  there  is  no  authority  by  any 
officer  or  director  given  by  articles  of  an  association  to  con- 
tract any  indebtedness,  the  partnership  debts,  which  this  decision 
speaks  of,  cannot  exist.  This  theory  of  direct  responsibility  of 
the  trustees  to  shareholders  is  shown  in  a  recent  decision  by 
the  Supreme  Judicial  Court  of  Massachusetts,25  where  some, 
but  not  all,  of  the  shareholders  joined  in  a  suit  against  trustees 
of  a  trust  estate  capitalized  at  an  amount  divided  into  shares. 
There  was  a  decree  in  favor  of  the  shareholders,  with  recovery 
to  be  ratably  distributed,  and,  as  showing  particularly  how  each 
interest  was  considered  separately,  the  trustees  were  held  not 
liable  to  account  to  a  shareholder  for  losses  caused  by  their  mis- 
conduct participated  in  by  such  shareholder,  but  to  all  the 
others  according  to  their  respective  interests.  It  is  to  be  noted 
here  also  that  this  trust  was  formed  in  a  way  very  similar  to 
those  considered  in  Williams  v.  Boston  and  Williams  v.  John- 
son, supra,  and  this  later  case  aids  the  construction  hereinabove 
urged  as  to  these  cases. 

§  88.  Summary. — It  would  seem,  therefore,  reasonably  estab- 
lished, that,  at  least,  if  the  instrument  creating  a  trust  for  busi- 
ness purposes,  in  which  trust  interests  are  represented  by  trans- 
ferable shares,  intends  that  there  shall  be  direct  accountability 
of  its  trustees  to  the  holders  of  the  shares,  such  relation  will 
be  fully  recognized  as  that  of  trustee  and  cestuis  que  trust.  That 
being  true,  it  would  follow,  that  the  usual  equitable  remedies, 
and  those  at  common  law  when  applicable,  could  be  employed 
when  a  shareholder's  interest  separately  considered  needed  the;r 
aid.  As  to  any  limitations  attaching  to  a  shareholder  being 
one  of  a  great  number  of  cestuis  que  trust,  it  is  thought  he 
would  stand  no  differently  than,  if  he  was  one  of  a  great  num- 
ber of  other  cestuis  que  trust  whose  interests  are  not  thus  de- 
fined. 


25Ashley  v.  Winkley  (1911),  209  Mass.  509,  95  N.  E.  932. 
120 


CHAPTER  XIII. 
PERPETUITIES  AND  RESTRAINTS  UPON  ALIENATION. 

§  89.  Trusts  by  Settlors  for  their  Sole  Benefit. — A  perpetuity 
is  obnoxious  to  American  jurisprudence,  primarily  because  it 
creates  an  absolute  suspension  of  the  power  of  alienation.  The 
creation  of  a  trust  naturally  suggests,  though  it  does  not  neces- 
sarily involve,  the  idea  of  such  suspension.  The  suggestion, 
however,  does  not  create  a  disfavor  against  trusts,  for  they 
are  favorites  of  equity.  At  most,  it  inclines  the  mind  to  scrutiny 
to  see  whether  under  the  cloak  of  a  trust  any  undue  restraint 
upon  alienation  is  attempted,  the  law  of  every  state  permitting 
some  restraint.  But  trusts,  as  holding  high  place  in  jurispru- 
dence, are  truly  portrayed  by  an  eminent  legal  author  as  follows  :* 
"The  system  of  trusts  is  now  so  thoroughly  recognized  that, 
according  to  the  laws  of  property  in  England  and  in  other  coun- 
tries where  the  English  common  law  is  in  force,  it  is  one  of  the 
rights  of  ownership  that  this  division  of  the  complete  title  should, 
if  desired,  take  place.  If  the  absolute  owner  of  the  property 
wishes  for  any  reason  to  have  the  equitable  title  only  vested 
in  him  and  the  legal  title  outstanding  in  another,  he  has  a  per- 
fect right  to  hold  and  enjoy  his  property  in  that  way.  Nor  is 
it  necessary  that  the  cestui  que  trust  should  be  under  any  disabil- 
ity in  order  that  he  may  enjoy  this  privilege.  A  person  sui 
juris,  and  who  is  absolute  owner  of  property,  may  avail  himself 
of  the  system  of  trusts,  and  may  keep  the  legal  title  outstanding 
in  another  as  long  as  he  sees  fit  so  to  do." 

Mr.  Bispham,  in  saying  this,  also  had  in  mind  the  ordinary 
constitution  of  a  trust  for  the  benefit  of  others  than  the  creators, 
as,  of  course,  is  universally  the  case  of  a  testamentary  trust 
and,  generally,  of  other  trusts.  But  basing  the  right  to  create 
at  all  on  ownership,  he  deduces  the  principle  that  "division  of 
IBispham's  Principles  of  Equity  (6th  Ed.)  Sec.  49. 

121 


§    89.]  RULE  AGAINST   PERPETUITIES.  [CHAP.    XIII. 

the  complete  title"  may  be  as  well  for  one  s  own  enjoyment  of 
the  equitable  interest  as  for  that  of  another.  This  proposition 
was  discussed  by  Lord  Cairns  as  follows:  "The  arguments  on 
behalf  of  the  respondent  appeared  to  me  to  go  almost  to  this, 
that  whenever  you  have  an  equitable  owner  who  is  the  absolute 
owner,  that  is  to  say,  entitled  to  the  whole  equitable  interest, 
such  a  person  ought  not  to  have  a  trustee  at  all  holding  indicia 
of  legal  ownership;  or,  if  he  chooses,  for  his  own  purpose,  to 
have  such  a  trustee,  he  must  be  in  danger  of  suffering  for  every 
act  of  improper  conduct  by  that  trustee;  and  that,  therefore, 
if  the  person  entitled  absolutely  to  the  equitable  interest  in  a 
share  in  a  railway  company,  chooses  for  his  own  purpose  to 
have  that  share  standing  in  the  name  of  a  trustee  for  him,  he 
will  be  bound  not  merely  by  a  valid  legal  transfer  of  that  share 
by  the  trustee,  but  by  any  equitable  dealing  or  contract  which 
the  trustee  may  choose  to  enter  into.  That  is  a  very  serious 
proposition.  It  goes  not  merely  to  shares,  but  it  goes  to  land 
and  to  every  other  species  of  property;  and  it  goes  to  say  that, 
whereas  there  is  a  large,  well-known,  recognized  and  admitted 
system  of  trusts  in  this  country,  that  system  of  trusts  is  to  be 
cut  down  and  moulded  and  reduced  to  this,  that  it  is  to  be  a 
system  applicable  only  to  infants,  married  women  or  persons 
with  limited  interests,  and  that  wherever  the  limited  interest  has 
ceased,  and  the  equitable  interest  has  become  entire  and  com- 
plete without  any  limit,  there  the  equitable  owner  is  under  some 
measure  of  obligation  with  regard  to  his  duty  of  watching  his 
trustee,  an  obligation  which  does  not  lie  upon  a  limited  owner. 
I  find  no  authority  for  such  a  proposition,  and  I  feel  satisfied 
that  your  Lordships  will  not  be  disposed  to  introduce,  for  the 
first  time,  that  as  a  rule  of  law."2  The  other  Lords  agreed. 
This  case  was  followed  later,3  Chitty,  J.,  saying  that  it  was  "the 
case  of  an  ordinary  trustee  holding  property  of  the  kind  in 
question  for  a  cestui  que  trust." 

That  a  testator  may  create  a  trust  and  vest  both  the  income 
and  remainder  in  the  same  persons  and  they,  though  their  inter- 
2Shropshire   U.   R.   &   C.   Co.  v.   The   Queen    (1875),   L.    R.   7   H. 
L.,  1.  c.  507. 

SCarritt  v.  Real  and  Personal  Advance  Co.  (1889),  42  Ch.  D.  263. 
122 


CHAP.   XIII.]  RULE   AGAINST   PERPETUITIES.  [§    90. 

ests  may  be  reached  by  creditors,  may  not  by  their  joint  act 
terminate  the  trust  in  contravention  of  the  express  provisions 
of  the  will,  has  been  held.4  The  court  said:  "While  the  will 
vests  the  fund  in  the  testator's  four  children,  it  does  not  give 
them  an  absolute  estate  and  then  impose  restrictions  and  con- 
ditions repugnant  to  the  estate,  but  gives  an  ownership  qualified 
by  the  directions  that  the  property  is  to  remain  for  a  time  in 
the  hands  and  control  of  the  executors  as  trustees.  Whether 
the  testator  made  these  provisions  for  one  purpose  or  another 
is  immaterial,  since  he  had  the  right  to  order  as  he  did."  This 
case  shows  a  "division  of  the  complete  title"  exactly  in  the  way 
that  results  from  a  settlor  conveying  the  legal  title  to  a  trustee 
and  reserving  the  entire  equitable  interest  in  himself,  except 
that  it  will  scarcely  be  said  he  could  not  revoke  his  own  direc- 
tions that  the  property  should  remain  in  the  hands  of  his  trustee 
for  a  time  less  than  that  appointed,  a  consideration  to  be  ad- 
verted to  later  on  in  this  chapter.  Indeed  it  will  be  inquired 
further  along  whether  or  not  this  very  right  of  revocation  does 
not  wholly  differentiate  this  kind  of  a  trust  from  all  of  those 
which  work  a  forbidden  suspension  of  the  right  of  alienation. 

§  90.  The  Nature  of  Perpetuities. — Consideration  of  the 
rule  against  perpetuities  shows  that  it  concerned  itself  about 
limitations  which  postponed  the  vesting  of  property  to  a  re- 
mote time,  thereby  causing  undue  restraint  upon  alienation.  Thus 
it  has  been  said:  "No  interest  is  good  unless  it  must  vest,  if  at 
all,  not  later  than  twenty-one  years  after  some  life  in  being  at 
the  creation  of  the  interest."5  And  a  definition  approved  by 
the  United  States  Supreme  Court6  is  as  follows:  "A  perpetuity 
may  be  defined  to  be  a  future  limitation,  restraining  the  owner 
of  the  estate  from  alienating  the  fee  of  the  property,  discharged 
of  such  future  use  or  estate,  before  the  event  is  determined,  or 
the  period  is  arrived  when  such  future  use  or  estate  is  to  arise."7 
Thereupon  the  court  said:  "It  is  then  a  limitation  upon  the  jus 

4Young  v.  Snow  (1897),  167  Mass.  287,  45  N.  E.  686. 
BGray  on  Perpetuities  (2nd  Ed.),  sec.  201. 
6Perin  v.   Carey   (1860),  65  U.  S.   (24  How.)    1.  c.   494. 
^Sander's   Essay  upon  Uses  and   Trusts,   196. 

123 


§  91.]  SUSPENSION  OF  ALIENATION.  [CHAP.  XIII. 

disponendi  of  property,  upon  the  common  law  right  of  every 
man  to  dispose  of  his  land  to  any  other  private  man  at  his  own 
discretion."  These  descriptions  show  that  a  perpetuity  affects 
in  no  way  a  vested  interest,  because  "ex  vi  termini  it  is  not 
subject  to  a  condition  precedent,"8  and  it  does  not  matter  that 
such  an  interest  may  not  give  a  right  to  the  possession,  as  for 
example  a  remainder  or  reversion,  where  no  contingency  may 
prevent  a  future  right  of  possession."9 

Inasmuch  as  these  business  trusts  reserve  to  cestuis  que  trust 
the  entire  equitable  interest  in  property,  immediately  vesting 
by  the  terms  of  instruments  creating  them,  and  there  are  no 
limitations  as  to  any  future  interest  or  estate  to  arise  upon  some 
condition  precedent,  it  would  seem  impossible  for  such  a  trust 
to  be  declared  void  under  any  rule  against  perpetuities.  There- 
fore, it  will  be  inquired  whether  such  a  trust  may  be  unlawful 
as  suspending  the  right  of  alienation.  Such  suspension  has 
been  spoken  of  inaccurately  as  a  perpetuity,  but  as  no  perpetuity 
is  forbidden  that  does  not  operate  as  a  suspension  of  the  right 
of  alienation  during  a  prescribed  period,  it  is  sufficient  to  inquire 
wherein  these  trusts  may  contravene  any  rule  of  law  against 
restraints  upon  alienation.  This  inquiry  will  relate  to  no  ques- 
tion of  a  future  estate,  except  incidentally,  as  none  by  these 
trusts  is  contemplated. 

§  91.  Suspension  of  the  Right  of  Alienation. — Restraint  upon 
alienation  is  a  part  of,  or  inheres  in,  the  rule  against  perpetuities, 
but  it  is  not  sufficient  alone  to  raise  application  of  the  rule. 
Thus  Mr.  Gray  says  it  is  a  "mistaken  idea  that  a  trust  violates 
the  Rule  against  Perpetuities  because  it  is  to  last  indefinitely."10 
Nevertheless,  a  trust,  if  it  effects  or  may  effect  an  absolute 
suspension  of  the  right  of  alienation  beyond  a  prescribed  period, 
would  seem  to  be  contrary  to  American  statutes,  and,  possibly, 
to  the  spirit  of  American  decision,  whether  it  could  be  deemed 

8Gray  on   Perpetuities,    (2nd   Ed.)   Sec.  205. 

SVanderpool   v.    Loew    (1889),    112    N.    Y.    167;    Seaver    v.    Fitz- 
gerald (1886),  141  Mass.  401. 

lOGray  on  Perpetuities  (2nd  Ed.),  Sec.  412. 
124 


CHAP.  XIII.]  SUSPENSION  OF  ALIENATION.  [§  92. 

opposed  to  the  strict  rule  against  perpetuities  or  not.  At  all 
events,  it  is  from  this  aspect  and  out  of  an  abundance  of  caution, 
that  these  trusts  will  be  treated  in  this  chapter,  for  it  is  certain, 
that,  if  a  trust  agreement  does  not  work  an  undue  restraint 
upon  alienation,  it  cannot  offend  the  rule  against  perpetuities. 
Employing  the  words  of  Mr.  A.  C.  Freeman  in  a  very  elaborate 
note  on  perpetuities,11  it  will  be  inquired  whether  the  "terms 
of  a  trust  are  such,  that  in  the  performance  of  the  duties  con- 
fided to  them,  the  trustees  may  be  required  to  hold  the  title, 
without  the  power  of  alienation  on  their  part,  beyond  that 
permitted  by  the  statute  of  the  state  forbidding  any  disposition 
of  property  which  may  restrain  the  power  of  alienation  beyond 
the  time  designated  therein,"  and  additionally  if  the  trustees 
are  so  required,  for  example,  by  a  testamentary  trust,  if  the 
statute  would  apply  where  settlors,  making  themselves  owners 
of  the  entire  equitable  interest,  may  alter  such  requirement. 

That  a  testamentary  trust  can  be  made  to  continue  for  a 
definite  period,  beyond  the  time  when  all  interests  are  vested, 
by  the  mere  fiat  of  a  testator  and  against  the  joint  act  of 
trustees  and  beneficiaries  seeking  to  terminate  it,  has  been  held 
by  the  Supreme  Judicial  Court  of  Massachusetts.12  But  it 
scarcely  is  to  be  doubted,  that  the  creator  of  a  trust  may,  with 
the  consent  of  all  interested  therein,  change  its  terms.  If  he 
may,  a  requirement  therein  that  trustees  have  no  power  of 
alienation,  is  not  conclusive  of  an  absolute  suspension  thereof. 

§  92.  Suspension  of  Power  of  Alienation  Must  be  Absolute. 
— A  very  interesting  case  of  a  trust  organized  "to  last  indef- 
initely," using  the  language  of  Mr.  Gray,  and  which  was  held 
not  to  cause  even  a  suspension  of  the  power  of  alienation  was 
decided  by  the  Illinois  Supreme  Court.13  This  trust  in  land 
was  organized  for  the  sole  benefit  of  its  creators  and  assignees 
to  whom  they  might  convey  their  separate  equitable  interests, 
represented  by  shares  in  the  capital  stock  of  the  trust.  The 
court  said:  "The  land  was  to  be  conveyed  to  the  trustees  to  be 

1149  Am.  St.  Rep.  129. 

12Young  v.  Snow,  supra. 

13Hart  v.  Seymour  (1893),  147  111.  598,  35  N.  E.  246. 

125 


§    92.]  SUSPENSION   OF   ALIENATION.  [CHAP.    XIII. 

subdivided  and  improved  and  then  sold,  and  the  time  of  sale 
'  was  left  wholly  to  their  discretion.  Indeed  the  whole  scheme 
of  the  association  was  to  purchase,  sub-divide  and  improve 
suburban  property  for  the  purpose  of  placing  it  at  once  upon 
the  market  for  sale.  No  trust  term  was  created  and  a  convey- 
ance of  the  land  or  any  part  of  it  at  any  time  was  no  violation 
of  the  trust.  Where  there  are  persons  in  being  at  the  creation 
of  an  estate,  capable  of  conveying  .an  immediate  and  absolute 
estate  in  fee  in  possession,  there  is  no  suspension  of  the  power 
of  alienation,  and  no  question  as  to  perpetuities  can  arise."  It 
was  unnecessary  for  the  court  to  say  that  even  had  the  trustees 
been  required  to  hold  the  title  indefinitely,  this  could  have 
been  changed  by  all  parties  in  interest  and  who  were  themselves 
creators  of  the  trust,  because  the  trustees  were  granted  by  the 
trust,  a  power  which  prevented  there  being  any  suspension  of 
the  power  of  alienation.  In  a  Massachusetts  case14  there  was 
a  trust  without  a  trust  term  and  with  no  power  in  the  trustees 
except  as  directed  by  the  directors  of  an  unincorporated  asso- 
ciation to  sell.  The  court  said:  "Such  a  trust  for  the  conven- 
ience of  an  unincorporated  association  in  renting  and  selling 
land,  under  which  the  land  is  held  for  no  other  purpose,  and 
where  the  income  is  not  accumulated  but  is  distributed  as  it 
accrues  and  where  the  land  is  to  be  sold  free  of  trusts  at  the 
will  of  the  association,  and  where  the  whole  equitable  interest 
in  the  trust  is  at  every  moment  vested  absolutely  in  those  who 
at  that  moment  are  shareholders,  and  never  can  become  vested 
in  any  other  persons  save  by  act  of  the  absolute  owners  or  by 
operation  of  law  upon  their  property,  and  not  by  force  of  any 
limitation  contained  in  the  deed  of  trust,  the  equitable  interests  so 
vested  being  also  constantly  vendible  by  their  several  owners  with- 
out let  or  hindrance,  as  well  as  subject  to  their  debts  and  passing 
like  other  property  upon  death  by  virtue  not  of  the  deed  of 
trust,  but  of  the  general  laws  governing  the  disposition  of 
property  of  decedents,  withdraws  no  property  from  commerce, 
and  is  not  within  the  reason  or  terms  of  what  is  called  the  rule 
against  perpetuities." 

14Howe  v.   Morse    (1899),   174  Mass.  491,  55  N.   E.  213. 
126 


CHAP.  XIII.]  SUSPENSION  OF  ALIENATION.  [§  92. 

It  is  to  be  said  that  Massachusetts  has  no  statute  modifying 
this  rule,  but  even  if  it  had  and  it  merely  condemned  suspension 
of  the  power  of  alienation,  without  reference  to  any  future  limi- 
tation as  to  vesting,  this  trust  would  not  have  been  condemned, 
because  it  was  said  that  it  "withdraws  no  property  from  com- 
merce." 

While  the  point  is  not  material  with  respect  to  suspension 
statutes,  yet  the  claim  of  perpetuity  made  in  the  case  because 
of  transferability  of  shares  is  convenient  to  be  noticed,  so  far 
as  what  this  court  said  on  the  point.  It  said :  "The  provisions 
by  which  the  trust  fund  may  be  at  some  time  held  for  the 
benefit  of  persons  not  shareholders  at  its  inception,  and  who 
may  become  such,  at  a  period  more  remote  than  that  allowed  by 
the  rule,  are  not  future  limitations  made  by  the  trust  deed  in 
the  sense  in  which  the  word  'limitation'  is  used  in  speaking  of 
the  operation  of  the  rule.  If  there  shall  ever  be  a  shareholder 
other  than  those  in  whom  the  whole  equitable  estate  was  abso- 
lutely vested  at  the  inception  of  the  trust,  that  shareholder  will 
not  take  his  interest  by  virtue  of  a  limitation  in  the  trust  deed, 
but  because  of  his  succession  by  virtue  of  the  general  principles 
of  law  to  the  property  of  the  original  shareholder.  *  *  *  The 
entire  ownership  is  never  for  a  moment  uncertain  nor  unvested, 
and  at  every  moment  each  owner  can  freely  dispose  of  his 
property,  and  at  each  moment  it  can  be  transferred  to  his 
creditor  by  the  ordinary  process  of  the  law,  and  at  each  moment 
the  trust  can  be  terminated  at  the  will  of  the  owners  of  the 
equitable  interest."  It  seems  too  plain  for  argument  that  the 
possessors  of  "the  entire  ownership"  could  terminate  such  a 
trust  at  any  moment,  whether  there  were  a  trust  term  stated 
or  not,  and  this  language  is  significant  in  view  of  what  the 
court  said  in  Young  v.  Snow,  supra,  where  there  was  a  testa- 
mentary trust.  The  author  of  that  trust  had  commissioned  no 
one  to  shorten  the  term  he  had  prescribed.  The  point  was  also 
made,  that  as  no  direction  could  be  given  for  a  sale  by  the 
trustees  except  by  a  three-fourths  vote  of  the  shareholders  this 
made  a  possible  title  continue  in  the  trustees  beyond  a  term 
allowed  by  law,  as  had  been  held  in  a  prior  case  by  this  court.15 
ISWinsor  v.  Mills  (1892),  157  Mass.  362,  32  N.  E.  352. 

127 


§    92.]  SUSPENSION    OF   ALIENATION.  [CHAP.    XIII. 

But  the  court  distinguished  the  two  cases  as  follows :  "The 
provision  in  the  present  trust,  that  the  shareholders  are  not  to 
have  any  interest  or  title  in  the  trust  property  itself  and  no  right 
to  call  for  partition,  and  that  the  share  shall  be  personal  property, 
is  not  a  restraint  upon  alienation,  since  the  alienation  of  the 
legal  and  equitable  ownerships  are  provided  for.  It  does  not 
appear,  and  cannot  be  assumed,  that  the  persons  who  organized 
the  association  and  became  its  shareholders  had  title  to  the  land 
held  by  the  trustees.  Their  whole  interest  comes  through  the 
shares  which  are  vendible  without  restraint.  In  Winsor  v. 
Mills,  Philbrick,  who  held  the  title,  owned  two  undivided  thirds 
of  the  land  and  held  the  remaining  undivided  third  in  trust  for 
Mills,  under  an  explicit  agreement  that  no  sale  or  conveyance 
of  the  land,  or  of  any  part  thereof,  or  any  interest  therein, 
should  be  made  by  Philbrick,  his  heirs  or  assigns,  except  upon 
the  written  consent  of  Mills,  his  heirs  or  assigns ;  and  there 
was  also  a  provision  by  which  a  part  of  the  land  might  be  pur- 
chased by  Mills  or  his  heirs  or  assigns  at  a  specified  price,  at 
any  time  before  the  land  should  be  otherwise  sold  or  disposed 
of.  These  were  restraints  upon  alienation,  and  were  held  void 
because  they  might  continue  too  long.  The  purpose  of  the 
trust  was  to  prevent  alienation  of  the  land  and  to  keep  it  out 
of  commerce.  Neither  of  the  owners  could  convey  his  own 
share  in  the  property  and  the  land  was  intentionally  tied  up." 

It  was  claimed  in  the  Winsor  case  that  the  rule  against  per- 
petuities only  applied  where  it  was  impossible  for  the  owners 
of  the  estate  to  convey  it,  but  the  court  said  this  was  not  ac- 
curate in  reference  to  many  cases  which  come  within  the  rule, 
and  it  would  not  apply  it  to  a  case  where  land  is  to  be  held  in 
fee  simple,  but  to  be  "inalienable  so  long  as  a  certain  other 
estate  remains  the  property  of  the  owner  and  his  descendants." 
In  other  words,  this  would  be  to  recognize  the  existence  of 
a  condition  precedent  to  the  right  to  convey  a  fee  simple  title, 
a  condition  intentionally  withholding  such  a  title  from  commerce. 

In  New  York  where  unlawful  suspension  may  accrue  by  rea- 
son of  a  trust-term,  with  no  power  of  alienation  while  the  trust 
existed,  if  the  term  exceeded  or  might  exceed  the  prescribed 
128 


CHAP.  XIII.]  SUSPENSION  OF  ALIENATION.  [§  92. 

period,  the  court  said:16  "The  mere  creation  of  a  trust  does 
not,  ipso  facto,  suspend  the  power  of  alienation.  It  is  only  sus- 
pended by  such  a  trust,  where  a  trust-term  is  created,  either 
expressly  or  by  implication,  during  the  existence  of  which  a 
sale  by  the  trustee  would  be  in  contravention  of  the  trust. 
Where  the  trustee  is  empowered  to  sell  the  land,  without  re- 
striction as  to  time,  the  power  of  alienation  is  not  suspended, 
although  the  alienation  in  fact  may  be  postponed  by  the  non- 
action  of  the  trustee,  or  in  consequence  of  a  discretion  reposed 
in  him  by  the  creator  of  the  trust.  The  statute  of  perpetuities 
(N.  B.  the  court  calls  this  a  statute  of  perpetuities,  though  it 
is  not  strictly  such,  but  only  a  statute  against  restraints  upon 
alienation)  is  pointed  only  to  the  suspension  of  the  power  of 
alienation,  and  not  at  all  to  the  time  of  its  actual  exercise,  and 
when  a  trust  for  sale  and  distribution  is  made,  without  restric- 
tion as  to  time,  and  the  trustees  are  empowered  to  receive  the 
rents  and  profits,  pending  the  sale  for  the  benefit  of  beneficiaries, 
the  fact  that  the  interest  of  the  beneficiaries  is  inalienable  by  stat- 
ute, during  the  existence  of  the  trust,  does  not  suspend  the 
power  of  alienation,  for  the  reason  that  the  trustees  are  persons 
in  being  who  can  at  any  time  convey  an  absolute  fee  in  posses- 
sion." The  observation  the  court  makes  about  interest  of  bene- 
ficiaries being  inalienable  can,  of  course,  have  no  application  to 
interests  in  trusts  this  book  is  considering,  as  we  have  shown 
that  a  settlor  cannot  thus  provide  for  himself  against  his  creditors 
and  by  the  trusts  themselves  shares  are  transferable.  But  the 
strength  of  the  court's  ruling  is  emphasized  by  such  a  remark. 

In  a  later  New  York  case17  expressly  approving  Roberts  v. 
Corning,  supra,  a  residuary  estate  was  held  not  subject  to  the 
perpetuities  statute  upon  the  following  reasoning:  "The  pay- 
ment of  the  bequest  of  the  residuary  estate  to  the  trustees  in 
Scotland  was  to  be  made  by  the  executors  as  soon  and  when 
the  same  was  converted  into  money.  The  fact  that  such  con- 
version might  require  a  period  of  time  not  measured  by  lives 

ISRoberts  v.  Corning  (1882),  89  N.  Y.  225. 

"Hope  v.  Brewer  (1892),  136  N.  Y.  126,  32  N.  E.  558,  18  L.  R. 
A.  458. 

129 


§    92b.]  SUSPENSION   OF  ALIENATION.  [CHAP.    XIII. 

does  not  create  an  unlawful  perpetuity.  *  *  *  It  was  within  the 
legal  power  of  the  executors  to  convert  the  whole  estate  into 
money  the  day  after  their  appointment  and  qualification,  and 
to  pay  over  the  residuary  fund  to  the  foreign  trustees,  and  this 
fact  would  seem  to  constitute  a  sufficient  answer  to  the  con- 
tention that  the  absolute  ownership  was  suspended,  by  any 
reason  of  any  power  or  duty  conferred  upon  the  executors." 

Where  there  was  a  provision  in  a  will  that  the  executor  should 
not  be  compelled  to  make  partition,  division  and  apportionment, 
until  after  five  years  from  the  probate  of  the  will  where,  as  in 
New  York,  suspension  is  measured  by  lives,  this  was  held  not 
objectionable,  because  "the  power  of  sale  was  not  suspended. 
He  could  sell  and  convey  an  absolute  fee  in  possession  at  any 
time  after  the  testator's  death."18 

§  92b.  No  Suspension  Where  Settlors  Are  Sole  Cestuis. — 
As  showing  that  it  is  only  where  a  trust  is  created  in  favor 
of  another  or  others  than  where  the  trustor  or  settlor  is  the 
sole  beneficiary,  that  the  instrument  must  alone  be  looked  to, 
to  ascertain  whether  there  is  an  absolute  suspension  of  the  power 
of  alienation,  a  decision  by  New  York  Supreme  Court  seems 
very  pertinent.19  In  that  case  it  was  claimed  that  a  deed  of 
trust  reserving  the  income  to  the  trustor  for  life  with  a  power 
of  appointment  by  will  to  say  where  it  should  then  go,  there 
was  a  violation  of  the  rule  against  perpetuities  It  was  said : 
"It  may  be  gravely  doubted  whether  that  deed  of  trust  imposed 
a  single  fetter  upon  the  hand  of  the  testator  to  write  such  a 
will  as  he  saw  fit.  He  was  not  executing  a  power  of  appoint- 
ment given  to  him  by  another.  His  was  not  an  act  which  de- 
rived its  force  from  any  delegated  authority.  *  *  *  It  is  difficult 
to  imagine  who  could  object  to  that  testator's  conveying  abso- 
lutely the  property  referred  to  in  the  trust  instrument  during 
life  *  *  *  notwithstanding  the  trust  deed.  After  that  deed  of 
trust  was  delivered  the  vital  ownership  of  the  income  and  the 

ISHenderson  v.  Henderson  (1889),  113  N.  Y.  1,  20  N.  E.  814. 
19United  States  Trust  Co.  v.   Chauncey   (1900),  66   N.  Y.  Supp. 
563,  32  Misc.  Rep.  358. 
130 


CHAP.    XIII.]  SUSPENSION  OF  ALIENATION.  [§   92b. 

property  itself  remained  in  the  trustor."  This  as  to  a  single 
settlor  or  trustor  seems  to  show  there  can  be  no  absolute  sus- 
pension of  the  power  of  alienation  where  "the  vital  ownership 
of  the  income  and  the  property  itself  remains  in  the  trustor," 
and  every  word  would  seem  applicable  to  several  trustors  who 
may  act  in  unison. 

In  a  decision  by  the  New  York  Court  of  Appeals20  it  was 
said,  where  a  like  reservation  was  made  in  a  deed  of  trust:  "He 
reserved  therein  the  beneficial  interest  during  his  life  and  a 
power  of  appointment  by  will.  This  was  little  less  than  owner- 
ship." 

But  another  New  York  case21  gives  yet  stronger  expression 
to  the  principle  indicated  by  the  New  York  Court  of  Appeals 
in  the  Livingston  case,  supra.  Thus  a  trustor  transferred  all 
of  his  property  to  a  trustee  to  manage  and  pay  trustor  the  in- 
come for  life  and  at  death  transfer  it  to  such  persons  as  he 
should  by  will  appoint.  It  was  claimed  that  the  will  and  the 
deed  taken  together  violated  the  rule  against  perpetuities, 
though  standing  alone  neither  would.  If  the  deed  was  irrev- 
ocable it  was  conceded  that  the  two  must  be  taken  together.  The 
court  said:22  "It  is  not  true  that  the  trust  was  irrevocable.  It 
is  only  in  cases  where  other  parties  besides  the  person  creating 
the  trust  have  an  interest  therein  that  the  trust  becomes  irrev- 
ocable. We  see  nothing  that  would  have  prevented  the  de- 
ceased from  revoking  the  trust  if  he  had  desired  to  do  so.  No 
one  had  any  interest  to  prevent  his  doing  so."  Therefore  it 
was  held  that  there  was  no  term  whatever  created  by  the  trust 
deed,  which  could  be  taken  into  account  upon  the  question  of 
there  being  or  not  any  suspension  of  the  power  of  alienation 
under  the  New  York  perpetuities  statute,  as  it  is  familiarly 
called,  notwithstanding  that  on  the  face  of  the  trust  deed  there 
was  a  trust  term  specified. 

20N.  Y.  L.   Ins.  &  T.  Co.  v.  Livingston   (1892),  133   N.  Y.   125, 
30  N.  E.  724. 

21Re.  Ogsbury  (1896),  39  N.  Y.  Suppl.  978,  7  App.  Div.  71. 
22ltalics  are  by  the  author. 

131 


§   92b.]  SUSPENSION  OF  ALIENATION.  [CHAP.   XIII. 

The  cases  from  New  York  last  above  cited  refer  to  a  single 
settlor  or  trustor  and  it  is  asserted  that  in  principle  they  apply 
to  more  than  one  trustor.  Happily  this  point  has  been  directly 
passed  upon  by  New  York  Court  of  Appeals.23  There  the  court 
said:  "If  there  is  a  present  right  to  dispose  of  the  entire  inter- 
est, even  if  its  exercise  depends  upon  the  consent  of  many  per- 
sons, there  is  no  unlawful  suspension  of  the  power  of  alienation." 

Infancy  of  beneficiaries  has  been  held  to  have  no  effect  on 
the  question  of  there  being  or  not  an  unlawful  suspension  of 
alienation.24  The  court  said  in  the  case  just  cited:  "I  have 
treated  this  just  as  if  all  the  children  were  adults  at  the  death 
of  their  mother,  as  the  statute  is  aimed  only  at  the  suspension 
of  the  power  of  alienation  by  the  terms  of  the  instrument,  and 
not  such  as  necessarily  arises  from  the  disability  of  infancy,  or 
from  other  causes  outside  of  the  instrument."  But  if  an  instru- 
ment is  revocable  by  adults,  as  shown  In  re.  Ogsbury,  supra, 
so  as  not  to  be  capable,  whatever  its  terms,  of  creating  an 
unlawful  suspension  of  the  power  of  alienation,  it  also  should 
be  thus  regarded  as  to  infants,  or  the  law  will  treat  the  shield 
of  personal  privilege  in  their  favor  as  a  sword  against  them. 

In  Wisconsin  it  was  said  as  to  a  testamentary  trust,  which 
was  of  indefinite  duration,  that  the  power  of  alienation  was  not 
unduly  suspended  both  because  the  trustee  could  sell  at  any  time, 
and,  thd  will  containing  no  prohibition,  express  or  implied,, 
against  terminating  it,  there  were  parties  in  being  who  could 
by  uniting  cause  its  termination,  when  they  became  sui  juris,2* 
thus  very  plainly  declaring  that  any  necessary  postponement 
arising  out  of  infancy  is  not  to  be  considered,  when  there  would 
otherwise  be  in  existence  those  capable  of  conveying  a  fee  in 
possession,  so  far  as  the  question  of  undue  restraint  of  trade 
is  concerned. 

23Williams  v.    Montgomery   (1896),   148   N.   Y.   519,   1.   c.   526,   43- 
N.  E.  57. 

24Beardsley  v.  Hotchkiss  (1884),  96  N.  Y.  201,  214. 

25Holmes  v.  Walten  (1903),  118  Wis.  409,  95  N.  W.  380,  62   L_ 
R.  A.  986. 
132 


CHAP.    XIII.]  ACCUMULATIONS.  [§    94. 

§  93.  Power  of  Sale  With  Directions  to  Reinvest. — It  is  be- 
lieved to  be  well  established  that,  though  a  trust  instrument  may 
authorize  a  sale  by  trustees,  yet,  if  the  proceeds  of  sale  are  to 
be  reinvested  upon  the  same  uses  and  trusts,  the  theory  of  undue 
restraint  of  trade  will  be  applied.  It  is  clear  that  this  would 
not  take  a  devise  or  legacy  out  of  the  rule  against  perpetuities, 
though  it  may  be  conceivable  that  such  a  provision  in  a  trust 
might  be  thought  not  to  offend  a  rule  against  suspension  of 
alienation.  It  could  be  urged,  in  the  latter  case,  that  the  prop- 
erty of  the  trust  was  not  thereby  withdrawn  from  commerce, 
and  investment  and  reinvestment,  over  and  over  again,  keeps 
it  in  commerce.  Especially  might  this  contention  seem  forceful 
as  to  a  business  trust  for  divers  reasons,  chief  among  which  is 
that  the  very  purpose  of  the  trust  is  not  to  withdraw  property 
from,  but  to  embark  it  in,  commerce.  Additionally  there  is  the 
fact,  as  shown  by  decisions,  supra,  that  the  trust  itself  is  at  all 
times  revocable  and  parties  are  at  every  moment  of  its  existence, 
capable  of  conveying  absolute  title  to  any  purchaser.  It  is 
unnecessary  to  discuss  the  cases  on  the  question  of  reinvestment, 
as  none  is  of  a  trust  for  the  trustor's  sole  benefit,  and  it  should 
be  frankly  conceded,  that,  if  this  kind  of  a  trust  may  create  an 
absolute  suspension  of  alienation,  despite  the  principles  in  the 
cases  we  have  cited,  the  mere  suggestion  above  made  must  be 
considered  upon  its  merits  or  the  lack  thereof,  there  being  no 
authority  found  on  the  precise  point. 

§  94.  Directions  for  Accumulation. — It  is  difficult  to  under- 
stand how  a  trust  inter  vivos  devoting  property  to  a  gainful 
pursuit  could  come  under  the  description  of  a  trust  for  accumu- 
lation, even  though  it  provided  for  its  profits  being  added  to 
capital  in  conformance  with  requirements  of  the  business  or  in 
the  discretion  of  the  trustees  reserved  as  surplus,  out  of  an 
abundance  of  caution.  All  such  arrangements  amount,  at  most, 
to  an  increase  of  capital  to  be  employed  in  the  same  way  that 
the  original  capital  was  at  first  employed.  If  the  shareholders 
are  the  sole  owners  of  equitable  interests  and  virtually  of  the 
capital  itself,  by  agreement  they  may  increase  or  diminish  it  at 
their  pleasure.  It  is  trust  property,  but  it  is  not  corpus  in  the 

133 


§    94.]  ACCUMULATIONS.  [CHAP.    XIII. 

same  sense  as  in  an  ordinary  testamentary  trust.  Cases  regard- 
ing corpus  and  its  accumulated  rents  and  profits  to  be  held  for 
a  definite  period  or  upon  the  arising  of  some  future  event,  are 
of  trusts  not  for  the  exclusive  benefit  of  settlors,  but  where  the 
accumulation  provisions  are  integral,  irrevocable  conditions  or 
limitations  upon  the  trust. 

This  view  as  to  accumulation  of  profits  receives  support  from 
a  decision  by  the  New  York  Court  of  Appeals,26  wherein  it 
appears  that  testator  had  provided  in  his  will  as  follows:  "I 
direct  that  my  executors  hereinafter  named,  or  such  of  those 
named  as  shall  qualify  as  such,  their  survivors  or  successors, 
shall  prosecute  or  carry  on  with  my  estate  or  property,  my 
present  business  under  the  firm  name  of  Garner  &  Co.,  for  and 
during  the  lifetime  of  my  wife,  Mary  Marcellite,  and  my 
daughter  Florence,  and  the  survivors  of  them,  and  all  profits 
and  gains  arising  from  said  business  shall,  after  the  sums  set 
apart  for  the  support  of  my  wife  and  children,  as  hereinafter 
provided  are  deducted,  be  added  to  and  form  a  part  of  the  work- 
ing capital  of  my  estate."  The  business  was  conducted  as  di- 
rected, and  consisted  in  the  manufacturing  and  selling  of  cotton 
goods  on  a  very  large  scale.  The  case  here  under  consideration 
came  up  as  a  result  of  an  accounting  in  which  the  daughters 
claimed  $3,748,314.84,  as  having  been  illegally  added  to  working 
capital  from  the  surplus  profits  and  gains  of  the  business.  The 
New  York  statutes  provide  that  directions  for  accumulation  of 
income,  in  whatever  form,  from  real,  or  personal  property  are 
only  permissible  when  made  for  the  benefit  of  minors  and  for 
the  duration  of  their  minority.  The  court  in  a  unanimous  opin- 
ion held  that,  although  trustees  in  the  management  of  a  business 
may  apply  "earnings  from  the  business  to  the  perfecting  of  its 
earning  capacity,  or  to  its  protection  in  various  ways,  and  the 
action  of  the  trustees  in  doing  so,  if  seen  to  have  been  a  reason- 
able exercise  of  discretion,  would  be  sustained  by  the  Courts," 
still  an  absolute  direction  to  accumulate  without  reference  to 
business  needs  offended  the  New  York  statute  and  rendered 
the  direction  to  accumulate  void.  However,  as  the  par- 

26Thorn  v.  De  Breteuil  (1904),  179  N.  Y.  64,  71  N.  E.  470. 
134 


CHAP.    XIII.]  LAWFUL    DURATION.  [§    95. 

ties  in  interest  had  assented  to  various  previous  accountings 
wherein  "the  aggregate  of  the  profits  and  gains  had  been  added 
to  the  capital  of  the  estate,"  they  were  estopped  from  after- 
wards setting  up  a  claim  to  them  as  constituting  illegally  with- 
held income. 

§  95.  Laivful  Period  of  Suspension  of  Alienation. — It  has 
been  thought  advisable  to  consider  whether  upon  principle  such 
a  trust  as  this  work  is  concerned  with  could  be  deemed, 
even  when  not  specifying  a  trust-term,  to  work  an  unlawful 
suspension  of  the  right  of  alienation.  This  assists  to  a  clearer 
understanding  of  the  nature  of  such  a  trust  and  to  differentiate 
it  from  one  in  which  cestuis  que  trust  have,  as  said  by  Lord 
Cairns,  supra, 26a  "limited  interests",  and  not  where  "the  equitable 
interest  has  become  entire  and  complete  without  any  limit." 
Then,  too,  it  is  found,  that  abundance  of  caution,  if  nothing 
else,  has  suggested  to  trustors  with  entire  and  complete  equit- 
able interests,  without  any  limit,  to  fix  a  term  for  the  dura- 
tion of  a  trust  agreement.  This  is  an  easy  requirement  where 
lawful  suspension  is  not  measured  by  a  life  or  lives  in  being, 
but  it  is  not  so  easy  where  such  is  the  measurement  of  dura- 
tion. Nevertheless,  even  that  measurement  admits  of  practi- 
cable employment,  conceding,  for  the  sake  of  argument,  that  a 
trust-term  should  be  stated. 

In  a  Wisconsin  case  where  there  was  a  suspension  of  aliena- 
tion for  the  expressed  period  of  twenty-one  years,  and  there 
was  a  statute  prohibiting  suspension  "for  a  longer  period  than 
during  the  continuance  of  two  lives  in  being  at  the  creation 
of  the  estate  and  twenty-one  years  thereafter,"  the  court  ruled 
the  suspension  was  lawful.  It  said:  "To  say  that  twenty-one 
years  can  be  a  longer  period  than  the  continuance  of  two  lives 
and  twenty-one  years  is  to  assert  that  one  of  its  parts  can 
be  greater  than  the  whole,  the  falsity  of  which  is  axiomatic 
in  law,  as  in  mathematics."27  The  lawfulness  of  such  a 

26a  §  89,  ante. 

27In  re.  Will  of  Kopmeier  (1902),  113  Wis.  233,  89  N.  W.  1134. 

135 


§    95.]  LAWFUL    DURATION.  [CHAP.    XIII. 

suspension,  where  such  period  was  similarly  measured,  is  strik- 
ingly illustrated  in  a  decision  by  the  U.  S.  Supreme  Court.28 
There  a  will  required  that  the  estate  should  be  held  in  trust  by 
the  executors  for  twenty  years  before  final  division  among  four 
children  and  that  the  share  devised  to  his  daughter  should  then 
be  conveyed  to  three  trustees  with  the  net  income  to  be  paid 
to  her  for  life  with  the  principal  after  her  death  to  her  chil- 
dren or  appointees.29  The  court  said:  "To  the  suggestion 
that  the  will  violated  the  rule  against  perpetuities,  which  pro- 
hibits the  tying  up  of  property  beyond  a  life  or  lives  in  being 
and  twenty-one  years  afterwards,  it  is  a  sufficient  answer  that 
after  twenty  years  from  the  death  of  the  testator,  and  after 
the  death  of  the  widow  and  daughter,  (if  not  before)  the  title, 
legal  and  equitable,  in  the  whole  estate  would  be  vested  in 
persons  capable  of  conveying  it."  Thus  again  it  is  seen  that 
there  is  no  suspension  where  there  is  a  right  to  convey.  This 
will  contemplated  the  tacking  of  one  trust  estate  upon  an- 
other to  run  for  longer  than  twenty  years,  the  period  being 
indefinite,  but  as  there  arose  upon  the  expiration  of  twenty 
years  the  power  of  alienation,  the  tacking  was  merely  contem- 
plated and  not  absolutely  enjoined. 

As  to  states  where  statutory  modification  has  measured  law- 
ful suspension  from  alienation  by  a  life  or  lives  it  is  premised 
that  the  only  cases  which  authority  supplies  are  where  trust 
instruments  are  irrevocable  trust  instruments  imposing  con- 
ditions upon  other  beneficiaries  than  the  settlors  or  trustors 
themselves.  But  considering  for  the  sake  of  argument  and 
despite  decision  supra,  that  no  trust  is  irrevocable  except  ''in 
cases  where  other  parties  besides  the  person  creating  the  trust 
have  an  interest  therein,"  it  will  be  attempted  to  show  how  in  an 
agreement  for  a  trust  to  carry  on  business,  in  these  states,  a 
practicable  trust-term  may  be  provided  for.  At  once  settlors 
in  such  an  attempt  are  confronted  with  the  prohibition  against 
creating  any  suspension  for  an  absolute  period  without  refer- 
ence to  any  lives.  Thus  where  a  "testator  intended  that  his 

28Fotter  v.  Couch  (1890),  141  U.  S.  296,  314,  11  S.  Ct.  Rep.  1005, 
35  L.  Ed.  721. 

29Italics  by  author. 

136 


CHAP.    XIII.]  LAWFUL    DURATION.  [§    95. 

residuary  estate  should  remain  in  the  hands  of  his  executors 
for  the  simple  purpose  of  accumulation  for  the  period  of 
ten  years  after  his  death,"  the  court  said:  "The  trust  is  not 
made  determinable  with  or  within  any  two  ascertained  lives, 
nor  is  it  limited  by  life,  but  during-  the  whole  of  that  fixed 
term  the  estate  is  inalienable."30  This  was  held  to  be  a  pro- 
hibited suspension,  and  the  residuary  clause  void. 

Neither  may  suspension  be  measured  by  any  greater  number 
of  lives  in  being  at  the  creation  of  a  trust  than  the  statute 
directs.  Thus  where  the  measure  was  no  longer  than  during 
two  lives  in  being  at  the  creation  of  the  estate,  a  suspension  to 
continue  until  the  death  of  four  designated  persons  was  held 
to  be  unlawful,31  and  so  where  the  principal  of  a  bequest  was 
to  vest  after  the  death  of  three  designated  persons.32 

In  the  last  two  cases  it  appears  that  the  suspension  was  nec- 
essarily to  continue  beyond  the  statutory  periods  while  in  Rice 
v.  Barrett,  supra,  it  might,  but  not  necessarily  would,  but  a 
fixed  period  however  brief  equally  offended  the  statute.  The 
suspension  must  not  be  measured  in  any  other  way  than  pre- 
scribed. But  a  period  of  time  may  be  provisionally  stated. 
Thus  where  a  trust  was  to  continue  until  grantor's  youngest 
child  then  living  should  attain  twenty-one  years  of  age,  pro- 
vided this  was  in  the  life  time  of  two  designated  persons, 
otherwise  to  cease  at  their  death,  it  was  ruled  there  could  be 
no  possibility  of  the  trust  continuing  beyond  the  duration  of 
two  designated  lives  and  it  was  therefore  a  lawful  suspension.33 
And  this  period  may  also  be  expressed  in  years  unless  sooner 
terminated  by  the  deaths  of  the  designated  persons.34  Thus  a 
will  was  sustained  which  provided  for  a  trust  for  twenty-five 

30Rice  v.  Barrett  (1886),  102  N.   Y.  161,  164;  6  N.  E.  39. 
SILeavitt  v.  Wolcott  (1884),  95  N.  Y.  212,  218. 
32Shipman  v.  Rollins   (1885),  98  N.  Y.  311. 
33Levy  v.  Hart  (1869),  54  Barb.  (N.  Y.)  248. 

34Simpson  v.  Cook   (1877),  24   Minn.   180;   Phelps'  Exr.  v.   Pond 
(1861),  23  N.  Y.  69. 

137 


§  96.]  RENEWAL  OF  TRUST  TERM.  [CHAP.  XIII. 

years,  except  that  if  death  occurred  before  that  the  estate  should 
be  distributed.35 

In  New  York,  Michigan  and  Minnesota  the  period  of  suspen- 
sion is  measured  by  two  lives  in  being  at  the  creation  of  an 
estate,  the  two  latter  states  adopting  the  New  York  statute 
and  presumably  therefore  with  construction  already  placed 
thereon.  Wisconsin,  up  to  1887,  had  the  same  statute,  but  in 
1887  the  words  "and  twenty-one  years  thereafter"  were  added. 

The  only  other  states  measuring  the  term  of  lawful  suspen- 
sion by  "lives  in  being  at  the  creation  of  the  estate"  are  Cali- 
fornia, Idaho,  Indiana,  North  Dakota  and  South  Dakota,  whose 
statutes  differ  from  the  New  York  statute  in  putting  no  re- 
striction upon  the  number  of  lives.  In  all  other  states  there  is 
an  absolute  period  of  at  least  twenty-one  years  beyond  a  life 
or  lives  in  being. 

It  is  also  to  be  said  that  construction  at  one  time  was  that 
designation  by  lives  must  be  among  those  of  the  beneficiaries.36 
But  this  holding  was  expressly  disapproved,  in  one  case  where 
duration  was  predicated  on  the  life  of  the  trustee,37  and  in 
another  case,  on  the  lives  of  two  persons  who  were  strangers 
to  the  trust.38 

§  96.  Provisions  for  Continuance  Beyond  Stated  Trust  Term. 
— As  to  providing  for  a  continuance  of  the  trust  to  a  time  be- 
yond the  trust  term  provided  for  in  the  trust  instrument,  by  a 
course  prescribed  by  that  instrument,  it  is  to  be  considered, 
whether  such  provision  could  or  might  offend  the  rule  against 
restraints  upon  alienation.  Thus  suppose,  that  the  power  to 
continue  should  be  confided  to  the  discretion  of  the  trustees  or 
be  left  to  be  decided  by  a  certain  proportion  less  than  the  whole 
of  the  cestuis.  It  would  seem  clear  that,  if  the  trustees  or,  for 
that  matter,  any  person  not  a  beneficiary  were  given  this  un- 

SCQxley  v.  Lane  (1866),  35  N.  Y.  340. 

36Downing  v.  Marshall   (1861),  23   N.  Y.  366. 

37Crooke  v.  County  of  Kings   (1884),  97  N.  Y.  421. 

38Bailey  v.  Bailey  (1884),  97  N.  Y.  460. 
138 


CHAP.   XIII.]  SUMMARY.  [§    98. 

restrained  power,  this  would  be  an  evasion  of  the  rule  against 
perpetuities.  But  as  trustees  should  not  control  the  cestuis  in 
this  regard,  why  should  any  number  of  cestuis  less  than  the 
whole  control  those  who  do  not  assent  to  a  continuance?  But 
it  may  be  said,  that  the  rule  against  suspension  of  alienation  does 
not  apply,  because  there  is  no  suspension  of  the  absolute  power 
of  alienation  for  reasons  shown  supra,  and  this  power  remains 
as  well  after  as  before  the  trust  is  continued.  This  would  seem 
to  be  a  good  answer,  but  whenever  it  is  deemed  advisable,  out 
of  caution,  to  state  a  term  and  to  state  that  in  accordance  with 
statute  prescribing  a  lawful  period  regarding  suspension  of 
alienation,  the  same  caution  would  recommend  that  neither  all 
nor  any  of  the  original  cestuis  nor  their  transferees  should  be 
committed  to  any  attempt  at  evasion  of  such  a  statute. 

§97.  Rule  Where  Restraint  is  Upon  Partition. — Another  rea- 
son why  this  rule  against  restraints  upon  alienation  does  not 
apply  to  these  trusts  may  lie  in  the  fact  that  interests  are  repre- 
sented by  transferable  shares,  the  holders  of  which  can  call  for 
no  right  of  partition  and  "a  prohibition  against  partition  is  not 
a  restraint  on  alienation,  as  the  undivided  share  is  always  assign- 
able."39 Therefore  if  the  trust  does  not  offend  against  the  rule 
against  restraints  upon  alienation,  such  a  provision  for  continu- 
ance from  a  new  date  whatever  its  terms  would  seem  to  be  valid. 
But,  if  any  doubt  exists  about  this  rule  applying,  it  were  safer 
not  to  provide  for  a  continuance  of  the  trust  in  the  absence  of 
consent  by  all  shareholders,  or  without  non-assenting  ones  hav- 
ing the  option  to  surrender  their  shares  upon  a  valuation  to  be 
made  as  may  be  prescribed. 

§  98.  Summary. — From  the  cases  hereinbefore  cited  and  dis- 
cussed it  appears  reasonably  certain  that  a  trust  with  no 
limitations  or  conditions  upon  the  vesting  of  a  future  estate  can 
by  no  sort  of  construction  be  called  a  perpetuity;  that  where 
it  does  not  suspend  the  absolute  power  of  alienation  during  a 
forbidden  period  it  comes  under  no  statutory  modification  of 
3»Gray  on  Restraints  on  Alienation  (1883),  Sec.  30;  Gray  on 
Perpetuities  (2nd  Ed.)  (1906),  Sec.  509  /;  Howe  v.  Morse  (1899),  174 
Mass.  491,  55  N.  E.  213. 

139 


§  98.]  SUMMARY.  [CHAP.   xm. 

the  rule  against  perpetuities;  that  where  no  one  other  than  the 
holders  of  transferable  shares  in  a  business  trust  have  any  in- 
terest therein  the  trust  is  revocable  and  at  all  times  there  are 
owners  in  possession  who  can  convey  and  thus  there  is  no 
absolute  suspension  of  the  power  of  alienation;  that  as  to  the 
rule  in  nearly  all  of  the  states  an  absolute  period  of  suspension 
of  at  least  twenty-one  years  is  lawful,  whatever  may  be  thought 
in  regard  to  these  business  trusts;  that  a  provisional  period  of 
time  may  be  fixed  where  the  absolute  duration  is  measured  by 
lives. 


140 


CHAPTER  XIV. 
ACTIONS  BY  AND  AGAINST  THE  TRUSTEES. 

§  99.  Trustee  of  an  Active  Trust  a  Principal  and  not  an 
Agent. — For  the  proper  presentation  of  the  subject  of  this  chap- 
ter the  individuality  of  a  trustee,  and  where  there  is  more  than 
one,  the  trustees,  of  a  business  trust  may  be  dwelt  upon.  In 
doing  this  recurrence  to  citation  of  cases  already  referred  to 
will  arise  along  with  citation  of  other  cases.  Thus  in  Taylor 
v.  Davis,1  Mr.  Justice  Woods  says  the  trustee  "is  a  principal 
and  not  an  agent,"  and  as  "a  trust  cannot  contract,  if  the 
trustee  is  not  bound,  then  nobody  is  bound,"  recognizing,  how- 
ever, that  if  he  chooses  he  may  exempt  himself  and  subject 
the  trust  property  to  liability  for  his  contracts.2 

The  personality  of  a  trustee,  as  distinguished  from  his  repre- 
sentative character,  was  early  recognized,  as  a  principle,  in 
our  jurisprudence.  Thus,  Mr.  Justice  Field  in  Pennoyer  v. 
Neff3  relied  upon  Massie  v.  Watts4  and  other  cases  for  the 
proposition  that  the  state  through  its  tribunals  may  compel  per- 
sons domiciled  within  its  limits  to  execute,  in  pursuance  of 
their  contracts  respecting  property  elsewhere  situated,  proper 
instruments  of  transfer  according  to  the  lex  rei  sitae.  Thus,  in 
the  case  relied  on  the  Chief  Justice  said:  "Where  the  de- 
fendant is  liable  to  plaintiff,  either  in  consequence  of  contract, 
or  as  trustee,  or  as  the  holder  of  a  legal  title  acquired  by  any 

1(1883),  110  U.  S.  330.  See  also  Mason  v.  Pomeroy  (1890),  151 
Mass.  164,  24  N.  E.  202,  7  L.  R.  A.  771;  Connally  v.  Lyons  (1891),  82 
Tex.  664,  18  S.  W.  799,  27  Am.  St.  Rep.  935. 

2See  also  Shoe  and  Leather  Bank  v.  Dix  (1877)  123  Mass.  148; 
Bank  of  Topeka  v.  Eaton  (1900),  100  Fed.  8;  Hussey  v.  Arnold 
(1904)  185  Mass.  202,  70  N.  E.  87. 

3(1877)   95  U.  S.   714. 

4(1810)   10  U.   S.   (6  Cranch)   148. 

141 


§  99.]  PARTIES.  [CHAP.  xiv. 

species  of  mala  fides  practiced  on  the  plaintiff,  the  principles 
of  equity  gave  a  court  jurisdiction  wherever  the  person  may 
be  found,"  and:  "Upon  the  authority  of  these  (cited)  cases, 
and  of  others  which  are  to  be  found  in  the  books,  as  well  as 
upon  general  principles,  this  court  is  of  opinion,  that  in  a 
case  of  fraud,  of  trust  or  of  contract,  the  jurisdiction  of  a  Court 
of  Chancery  is  sustainable  wherever  the  person  be  found,  al- 
though land  not  within  the  jurisdiction  of  that  court  may  be 
affected  by  the  decree." 

Again  it  has  been  held  that  a  trustee  is  a  person,  in  the 
same  way  that  a  natural  person  is  distinguished  from  a  cor- 
poration, under  the  Federal  Constitution.5  Thus,  in  the  first 
of  the  cases  cited  in  the  note,  Gresham,  C.  J.,  said :  "It  will 
be  observed  that  (this  (Indiana)  Statute  does  not  prohibit 
foreign  corporations  from  doing  business  in  this  state.  Ob- 
viously that  was  not  the  design  of  the  legislature.  It  is  a 
statute  which  denies  to  residents  of  other  states  the  right  to 
take  and  hold  in  trust,  otherwise  than  by  last  will  and  testa- 
ment, real  and  personal  property  in  Indiana.  The  right  is  as- 
serted to  deny  to  persons,  associations  or  corporations,  with- 
in or  without  the  state,  power  to  convey  to  any  person  in  trust 
not  a  resident  of  Indiana,  real  or  personal  property  within  the 
state.  This  is  a  plain  discrimination  against  the  residents  of 
other  states." 

Still  further  decision  as  to  jurisdiction  of  federal  courts  in 
diversity  of  citizenship  exemplify  the  personal,  as  opposed  to 
the  representative,  capacity  of  trustees.  Thus  it  was  ruled 
that  a  federal  court  obtains  jurisdiction  through  the  trustee, 
though  the  beneficiary  may  be  of  the  same  state  as  the  defend- 
ant, where  the  suit  is  brought.6  This  rule  extends  even  to  a 

SFarmers'  Loan  &  T.  Co.  v.  Chicago  &  A.  Ry.  Co.  (1886),  27 
Fed.  146,  149.  See  also  Shirk  v.  La  Fayette  (1892),  52  Fed.  855; 
Roby  v.  Smith  (1891),  131  Ind.  342,  30  N.  E.  1093. 

SDodge  v.  Tulleys  (1892),  144  U.  S.  451,  456;  12  S.  Ct.  Rep.  728, 
36  L.  Ed.  501.     See  also  Peper  v.  Fordyce   (1886),  119   U.  S.  469,  7 
S.    Ct.   Rep.  287,   30   L.   Ed.  435;   Coal   Co.   v.   Blatchford    (1870),   73 
U.  S.   (11  Wall.)   172,  20  L.  Ed.  179. 
142 


CHAP.    XIV.]  PARTIES.  [§    99. 

case  where  a  beneficiary,  with  the  requisite  diversity,  sues  in- 
stead of  a  trustee,  who  is  without  such  diversity,  jurisdiction 
for  this  reason  being  denied.7  It  is  also  held  that  the  rule  of 
there  being  or  not  jurisdiction  in  all  of  the  plaintiffs  or  in  all 
of  the  defendants  being  qualified  applies  in  the  same  way  to 
trustees  as  to  others.8  It  was  also  ruled  that  the  trustee  of 
an  active  trust  made  so  by  the  act  of  the  parties  creating  the 
trust  is  not  a  formal  or  nominal  party.9 

The  fact  of  personal  capacity  being  of  controlling  influence 
was  recognized  by  the  Supreme  Court  of  Mississippi  where  it 
announced  the  general  rule  expressed  in  Taylor  v.  Davis,  supra, 
and  then  said :  "But  while  this  is  the  rule,  there  are  excep- 
tions to  it,  and  where  expenditures  have  been  made  for  the 
benefit  of  the  trust  estate,  and  it  has  not  paid  for  them,  direct- 
ly or  indirectly,  and  the  estate  is  either  indebted  to  the  trus- 
tee, or  would  have  been,  if  the  trustee  had  paid,  or  would  be 
if  he  should  pay  the  demand,  and  the  trustee  is  insolvent  or 
non-resident,  so  that  the  creditor  cannot  recover  his  demand 
from  him,  or  will  be  compelled  to  follow  him  to  a  foreign 
jurisdiction,  the  trust  estate  may  be  reached  directly  by  a 
proceeding  in  Chancery."10  This  is  really,  if  not  quite  equiva- 
lent to,  saying  that  an  attachment  might  be  sued  out  for  non- 
residence,  the  only  obstacle  to  such  announcement  being  that 
it  is  necessary  to  proceed  in  equity  to  subject  trust  property 
to  a  debt  created  by  a  trustee.  Where  statute  may  provide  that 
it  may  be  reached  by  an  action  at  law,  it  would  seem  certain 
that  process  by  attachment,  upon  the  ground  of  non-residence 
of  trustee,  would  lie,  at  least,  if  he  by  himself  or  agent,  were 
in  control  and  management  of  trust  property  in  the  jurisdiction. 

District  of  Columbia  Court  of  Appeals  shows  that  a  trustee 
is  not  a  mere  officer,  like  an  executor  or  administrator  to  be 

?Shipp  v.  Williams   (1894),  62  Fed.  4,   10  C.  C.  A.   247. 
8Coal  Co.  v.  Blatchford  and  Shipp  v.  Williams  supra. 
9Shipp  v.  Williams  supra;  Knapp  v.  Railroad  Co.   (1873),  87  U. 
S.  (20  Wall.)  117,  22  L.  Ed.  328. 

lONorton  v.   Phelps    (1877),   54   Miss.  467,  471. 

143 


§  100.]  PARTIES.  [CHAP.  xiv. 

called  to  account  in  the  jurisdiction  where  he  is  appointed  but 
he  may  be  sued  in  whatsoever  jurisdiction  he  may  be  found.11 
In  this  case  the  defendant  was  a  resident  of  Fairfax  County, 
Virginia,  by  the  court  of  which  he  was  appointed  executor. 
The  suit  was  to  recover  a  legacy  and  was  brought  in  the  Su- 
preme Court  of  the  District  of  Columbia,  where  personal  serv- 
ice was  obtained.  The  court  said:  "This  is  not  a  suit  for  the 
settlement  of  the  estate.  There  is  no  controversy  as  regards 
the  executor's  account.  There  does  not  appear  to  be  any  ques- 
tion of  the  right  of  any  creditor.  Some  sixteen  years  had 
elapsed  since  the  probate  of  the  will.  From  the  statement  of 
the  terms  of  the  will  contained  in  the  bill,  it  would  appear  that 
defendant  Herbert  stood  in  two  relations  to  the  testator:  first 
as  executor  for  all  purposes  of  administration,  and  second 
as  trustee  for  the  benefit  of  legatees,  after  the  estate  shall  be 
closed  and  until  the  death  of  Mary  Johns.  The  lapse  of  time, 
the  facts  alleged  in  the  bill,  all  go  to  show  his  assent  to  the 
trust  created  in  him  by  the  legacy.  As  a  trustee  of  the  legacy 
then,  and  not  as  executor  of  the  estate,  he  is  amenable  to 
suits  in  the  courts  of  any  jurisdiction  within  which  he  may 
be  found." 

§  100.  Necessary  Parties  Defendant  in  Actions  Against 
Trustees. — The  characteristic  and  sufficiency  of  jurisdiction  in 
personam,  when  trustees  are  sued,  are  further  illustrated  in  cases, 
which  hold  that  beneficiaries  or  cestuis  que  trust  need  not  be 
joined  as  parties  defendant,  when  actions  are  founded  either 
upon  contracts  entered  into,  or  for  torts  committed,  by  trustees. 

The  obligation  of  trustees,  as  said  in  the  English  case  of  In 
re  Frith  (1902),  1  Ch.  D.  342,  is  such  that  "the  creditor  is  en- 
titled to  sue  all  three  or  any  two  or  any  of  them,"  there  being 
three  trustees  of  that  trust,  which  was  a  boot  manufacturing 
business.  Selection  of  trustee  defendants  in  this  case  was  ma- 
terial as  to  the  right  of  the  creditor  to  avail  himself  of  the 
trustee's  right  of  indemnity,  it  appearing  that  one  of  said  trus- 
tees was  a  defaulter.  As  trustees  contract  and  the  trust  estate 

"Johns  v.   Herbert   (1894),  2  App.  D.  C  485,  497. 
144 


CHAP.    XIV.]  PARTIES.  [§    101. 

does  not,  the  usual  principles  about  joint  and  several  obligors 
apply.  If  the  trust  estate  is  sought,  statutes  as  to  right  of  service 
by  publication  may  be  available. 

Where  liability  is  limited  to  the  trust  fund  it  would  appear  to 
the  writer  that  the  only  safe  procedure  would  be  to  make  all 
the  trustees  defendants,  unless  the  trust  instrument  specifically 
waives  this,  in  order  that  title  would  pass  upon  judicial  sale. 

It  has  been  held  by  some  courts  and  stated  by  Dean  Ames  in 
his  cases  on  Trusts,  page  262,  that  in  a  foreclosure  bill  a  trustee 
does  not  adequately  represent  assets,  principally  because  the 
cestuis  should  have  opportunity  to  tender  the  amount  necessary 
to  prevent  foreclosure,  but  this  seems  merely  an  exception  in 
the  way  of  a  choice  by  cestuis  to  preserve  the  estate  by  volun- 
tary contributions. 

§  101.  Trustee  Sued  Alone  Where  Instrument  Gives  Trus- 
tee Full  Control. — Chief  Justice  Waite  expresses  the  rule  as  to 
the  necessity  or  not  of  joining  beneficiaries,  as  follows :  "It 
cannot  be  doubted  that  under  some  circumstances  a  trustee  may 
represent  his  beneficiaries  in  all  things  relating  to  their  com- 
mon interest  in  the  trust  property.  He  may  be  invested  with 
such  powers  and  subjected  to  such  obligations  that  those  for 
whom  he  holds  will  be  bound  by  what  is  done  against  him  as 
well  as  what  is  done  by  him.  The  difficulty  lies  in  ascertaining 
whether  he  occupies  such  a  position,  not  in  determining  its 
effect  if  he  does.  If  he  has  been  made  such  a  representative, 
it  is  well  settled  that  his  beneficiaries  are  not  necessary  par- 
ties to  a  suit  by  him  against  a  stranger  or  to  one  by  a  stranger 
against  him  to  defeat  it  in  whole  or  in  part."12 

One  of  the  cases,  which  the  Chief  Justice  cites  as  authority 
to  this  proposition,  was  where  a  creditor  sought  to  reach  trust 
property  in  the  hands  of  trustees.  After  the  action  was  com- 
menced one  of  the  beneficiaries  asked  to  be  made  a  party  de- 
fendant, alleging  collusion  of  the  trustees  with  the  plaintiff  and 
that  the  former  did  not  intend  to  make  defence,  for  which  affi- 
12Kerrison  v.  Stewart  (1876),  93  U.  S.  155,  160. 

145 


§  101.]  PARTIES.  [CHAP.  xiv. 

davits  were  submitted.  His  application  was  denied.  The  court  an- 
nounced that:  "The  principle  seems  well-settled  that  in  an  ac- 
tion by  a  creditor  to  reach  trust  property,  in  the  hands  of  ad- 
ministrators or  trustees,  who  have  the  control  of  and  whose 
duty  it  is  to  protect  the  property,  the  cestuis  que  trust  need  not 
be  made  parties.  The  defence  of  the  trustees  is  their  defence, 
and  their  presence  in  court  is  not  necessary  to  the  protection 
of  their  interests."13 

In  Florida  the  rule  of  beneficiaries  not  being  necessary  par- 
ties, where  it  is  sought  to  reach  the  trust  property  in  a  direct 
proceeding,  is  stated  by  way  of  exception  as  follows:  "The 
trust  property  cannot  be  reached  except  by  a  proceeding  in 
Chancery  to  which  the  cestuis  que  trust  must  be  made  parties; 
unless  in  cases  where  the  property  has  been  bound  by  the 
trustees  within  the  scope  of  their  authority."14  Similarly  has 
the  rule  been  stated  in  Illinois  where  it  was  said:  "The  gen- 
eral equity  rule  is  that  all  persons  interested  in  the  subject  mat- 
ter of  a  suit  must  be  made  parties  in  order  that  the  decree  may 
affect  their  rights,  and  this  rule  requires  that  in  litigation  had 
in  respect  to  trust  property,  both  the  trustee  and  the  cestuis 
que  trust  be  made  parties.  There  is  an  exception  to  this  where 
the  trust  is  an  active  one,  imposing  on  the  trustee  the  duty  of 
receiving,  controlling  and  working  the  trust  fund  for  the  bene- 
fit of  the  cestuis  que  trust."15 

An  illustration  of  the  completeness  of  this  principle,  not  only 
as  a  rule  of  practice,  but  also  as  a  rule  of  right,  is  furnished  by 
a  North  Carolina  case.16  That  case  concerned  the  enforce- 
ment of  a  mechanics'  lien  against  trust  property.  The  trial 
court  rendered  personal  judgment  against  the  trustees,  but  re- 
fused to  subject  the  property  to  the  lien  because  the  cestuis  que 

13Winslow  v.  Minn.  &  P.  R.  R.  Co.  (I860),  4  Minn.  313,  317; 
77  Am.  Dec  519.  See  also  4  Lawson's  Rights,  Remedies  &  Practice 
!§  2023. 

l^Zehnbar  v.   Spillman    (1889),  25   Fla.   591,   598. 

ISMcGraw  v.   Bayard   (1880),  96  111.  146,  152. 

ISCheatham  v.  Rowland   (1885),  92  N.  C.  340. 
146 


CHAP.    XIV.]  PARTIES.  [§    102. 

trust  had  not  been  made  parties.  The  Supreme  Court  held  this 
error,  because  the  trustees  were  "as  legal  owners  in  charge 
to  manage  and  take  care  of  the  common  property,  not  only  in 
its  preservation,  but  in  its  defence  against  unjust  and  un- 
reasonable demands,  from  whatever  source  they  may  come." 
The  court  also  said  that  this  was  so  entirely  true  that  the  statute 
of  limitations  operating  against  them  would  also  operate  against 
cestuis  que  trust  though  they  be  infants  or  married  women.17 

Of  course  there  is  a  conclusive  reason  for  beneficiaries  not 
being  made  parties,  where  merely  a  personal  judgment  is  sought 
against  a  trustee.  It  may  be  observed,  however,  in  passing,  that 
this  personal  liability  of  the  trustee  is  the  specific  reason  given 
in  a  Texas  case  for  beneficiaries  not  being  necessary  paities.18 
The  other  cases  above  referred  to  in  this  chapter  seem  to  prove, 
that  power  may  be  so  vested,  along  with  the  legal  title,  in  trus- 
tees, that  even  when  it  is  sought  to  reach  the  trust  property  the 
only  necessary  parties  defendant  are  the  trustees,  this  being 
thought  to  be  true  especially  where  "the  cestuis  que  trustent  are 
so  numerous  and  so  constantly  changing  by  death,  removal,  etc. 
beyond  the  jurisdiction."19  When  we  remember  that  the  de- 
cisions cited  and  quoted  from  merely  deduce  their  conclusions 
from  the  mere  commission  of  management  and  control  to  trus- 
tees, a  fortiori  are  such  conclusions  applicable,  when  the  trust 
instrument  provides  in  terms,  that  trustees  conclusively  may 
act  so  as  to  bind  the  trust  property  for  all  acts  and  contracts 
done  and  entered  into  in  execution  of  powers  vested  in  them. 

§  102.  Trustees  as  Plaintiffs. — In  principle  it  may  be  said 
that  the  cases  already  cited  and  quoted  from  in  this  chapter, 

17For  other  cases  of  and  regarding  trustees  of  active  trusts,  see 
Bushong  v.  Taylor  (1884),  82  Mo.  660,  670;  Lebeck  v.  Fort  Wayne 
Bank  (1896),  115  Ala.  447,  453,  22  So.  75,  67  Am.  St.  Rep.  51;  San- 
ders v.  Houston  Guano  Co.  (1899),  107  Ga.  49,  56,  32  S.  E.  610. 

ISConnally  v.  Lyons  (1891),  82  Tex.  664,  18  S.  W.  799,  21  Am. 
St.  Rep.  935. 

iSBushong  v.  Taylor,  supra,  citing  Van  Vetchen  v.  Terry,  » 
Johns,  Ch.  197  and  Story's  Eq.  PI.  §§  148,  150,  207a. 

147 


§  103.]  PARTIES.  [CHAP.  xiv. 

i 

and  those  referred  to  from  the  standpoint  of  personal  liability, 
are  applicable  under  this  section,  because  the  same  general  in- 
quiry is  at  stake,  viz :  whether  there  are  sufficient  parties  before 
the  court  for  it  to  determine,  conclusively,  the  subject  matter 
in  controversy.  In  addition,  however,  it  may  be  said  that  :20 
"The  modern  codes  which  provide  that  actions  shall  be  brought 
by  the  real  party  in  interest,  universally  authorize  trustees  of 
express  trusts  to  sue  in  their  own  names  without  joining  the 
beneficiaries,  as  an  exception  to  the  rule,"  and  for  this  statement 
very  numerous  cases  from  many  states  are  cited.  It  is  use- 
less here  to  cite  local  statutes  on  this  subject,  but  practitioners 
are  referred  respectively  to  their  own  codes.  Such  an  exception 
may  be  thought  to  be  expressed  more  out  of  abundance  of  cau- 
tion than  otherwise,  for  a  legal  owner  ought  to  be  considered, 
in  a  matter  of  pleading,  as  the  real  owner,  and  especially  so 
when  that  legal  owner  has  the  same  control  over  property  to 
which  he  has  the  legal  title  as  has  the  absolute  owner.  It  is 
stated,  therefore,  as  a  principle  that  "the  trustee  and  not  the 
beneficiary  is  the  proper  party  to  sue  at  law  upon  contracts 
made  with  the  trustee."21 

§  103.  Trustees  Suing  in  Foreign  Jurisdiction. — The  distinc- 
tion between  an  appointee  of  a  court,  in  that  the  powers  vested 
in  him  must  be  exercised  within  the  jurisdiction  of  the  court  ap- 
pointing him,  or  at  least  within  the  state,  and  a  trustee  whose 
title  is  created  by  the  owner  of  property  has  been  thus  stated: 
"Where  the  legal  title  of  the  trustee  is  created  by  the  owner  of 
the  property,  it  would  be  respected,  and  the  right  of  the  trus- 
tee to  enforce  it  be  recognized  everywhere.  It  would  not  be 
deemed  material  that  the  legal  title  was  encumbered  with  a 
trust.  The  jus  disponendi  would  be  acknowledged  and  effect 
given  to  it,  though,  of  course,  any  requirement  of  the  local  law 

2022   Ency.    PI.    &  Pr.    167. 

21  22  Encl.  Plead.  &  Prac.  179;  Oelrichs  v.  Spain  (1872),  82  U.  S. 
(15  Wall)  211,  21  L.  Ed.  43;  Grady  v.  Ibach  &  Co.  (1891),  94  Ala. 
152,  10  So.  287;  Morrow  v.  Morrow  (1905),  113  Mo.  App.  444,  87 
S.  W.  590;  Western  R.  Co.  v.  Nolan  (1872),  48  N.  Y.  513;  Lee  v. 
Horton  (1877),  104  N.  Y.  538,  11  N.  E.  51. 
148 


CHAP.    XIV.]  PARTIES.  [§    103. 

as  to  formalities  must  be  observed.  Thus:  if  the  title  of  the 
trustee  is  created  by  will,  the  will  must  be  proved  in  the  state 
where  the  suit  is  brought,  according  to  the  local  law,  to  give 
effect  to  any  title  under  it.  So  if  the  legal  title  be  by  deed,  the 
deed  must  be  proved  according  to  the  local  law.  In  this  regard 
the  legal  title  of  the  trustee  does  not  differ  from  any  other 
legal  title,  and  he  can  everywhere  enforce  that  title  by  legal  pro- 
ceedings, the  same  as  any  other  owner."22 

A  New  York  case  enforces  the  same  general  view  as  Curtis  v. 
Smith,  supra,  though  differing  with  it  on  a  question  of  prac- 
tice.23 Thus,  where  it  was  held  by  the  trial  court,  that  a  testa- 
mentary trustee  under  a  foreign  (Canadian)  will  had  no  legal 
capacity  to  sue  in  that  state  without  the  will  were  first  admitted 
to  probate  in  the  state,  the  Court  of  Appeals  overruling  this 
view  said:  "The  trustee  could  have  maintained  an  action  in  the 
courts  of  this  state  to  recover  any  of  the  trust  property  wrong- 
fully detained  here,  or  for  the  wrongful  conversion  of  such 
property,  or  for  damages  thereto.  Such  an  action  would  not 
have  been  in  a  representative  capacity,  but  in  his  own  right  as 
the  legal  owner  of  the  property.  It  might  have  been  necessary 
for  him,  upon  the  trial  of  such  an  action,  to  have  the  will  proven 
and  put  it  in  'evidence  for  the  purpose  of  showing  his  title,  but 
it  would  not  have  been  necessary  for  him  to  have  the  will  ad- 
mitted to  probate  in  this  state.  *****  jt  js  the  general  rule 
that  he  who  is  the  legal  owner  of  property  may  maintain  an  ac- 
tion wherever  it  may  be  for  its  recovery,  or  for  damages  for 
its  conversion.  *******  jn  such  cases  all  owners  stand 
upon  the  same  footing.  But  the  rule  is  somewhat  modified 
when  one  sues  in  a  representative  capacity.  Foreign  executors 
and  administrators  cannot  sue  here  for  reasons  of  public  policy." 

Here  there  is  again  perceived  the  same  distinction,24  which 
sustained  an  action  against  a  trustee,  who  was  also  an  execu- 

22(Jurtis  v.  Smith    (1869),  6   Blatchf.  537,  6  Fed.  Cas.  3505. 
23Toronto  General  Trust  Co.  v.  Chicago,  B.  &  Q.  R.  Co.  (1890) 
123   N.  Y.   37,  25  N.   E.   198. 
24§   99   ante. 

149 


§    104.]  RIGHT   TO   SUE    IN    FOREIGN    STATE.  [CHAP.    XIV. 

tor,  in  a  jurisdiction  where  he  was  found.  The  personal,  and 
not  the  representative,  capacity  for  jurisdictional  purposes,  was 
recognized  in  both  cases. 

§  104.  Constitutional  Right  of  a  Foreign  Trustee  to  Sue  in 
Another  State. — The  several  cases  which  are  referred  to25  on 
diversity  of  citizenship  seem  to  involve  the  conclusion  that  the 
right  of  a  trustee  to  sue  in  another  state  is  annexed  to  citizen- 
ship especially,  also,  those  cases  condemning  an  Indiana  Statute 
as  a  "plain  discrimination  against  the  residents  of  other  states," 
for  the  reasons  stated  by  Judge  Gresham,  supra.25  But  a  very 
recent  decision  by  the  Federal  Supreme  Court  brings  into  relief 
this  question,26  in  a  two-fold  view. 

In  this  case  a  receiver  appointed  by  a  Minnesota  Court,  with 
authority  to  sue  stockholders  of  an  insolvent  corporation  upon 
their  double  liability  was  held  by  Wisconsin  courts  not  en- 
titled there  to  sue,  because  such  a  liability  was  contrary  to  the 
public  policy  of  Wisconsin.  The  primary  question  considered 
by  the  Federal  Supreme  Court  was  the  effect  of  the  faith  and 
credit  clause  of  the  Constitution.  In  his  reasoning  to  his  con- 
clusion reversing  the  Wisconsin  courts  for  not  giving  effect  to 
this  clause  Justice  Van  Devanter  said,  among  other  things: 
"Under  this  (Minnesota)  statute  as  interpreted  by  the  Su- 
preme Court  of  the  state,  as  also  by  this  court,  the  receiver  is 
not  an  ordinary  chancery  receiver  or  arm  of  the  court  appoint- 
ing him,  but  a  quasi  assignee  and  representative  of  the  creditors 
and  when  the  order  levying  the  assessment  is  made  he  becomes 
invested  with  the  creditors'  right  of  action  against  the  stock- 
holders, and  with  full  authority  to  enforce  the  same  in  any 
court  of  competent  jurisdiction  in  the  state  or  elsewhere."27 

It  might  be  enough  merely  to  suggest  that  this  receiver  called 
by  the  court  "  a  quasi  assignee"  could  as  appropriately  have 

25§  99    ante. 

26Converse  v.   Hamilton   (1912),  224  U.  S.  243,  32  Sup.  Ct.  Rep. 
415. 

27See  also   Bernheimer  v.  Converse   (1907),   206  U.   S.  516,   534. 
150 


CHAP.    XIV.]  RIGHT    TO   SUE   IN    FOREIGN    STATE.  [§    105. 

been  called  a  trustee  of  the  creditors,  and  this  suggestion  de- 
rives force  from  one  of  the  cases28  cited  by  Bernheimer  v.  Con- 
verse, supra,  in  which  cited  case  it  was  said:  "The  statutory 
liability  of  stockholders  is  an  asset  of  the  insolvent  bank,  the 
title  to  which  was  in  said  receiver  as  a  trust  fund  for  the  pur- 
pose of  satisfying  the  claims  of  creditors."  In  another  of 
those29  cited  cases,  it  was  said  of  such  a  receiver  that:  "By  in- 
terest of  his  official  relation  to  the  corporation  and  its  creditors 
he  is  the  owner  of  the  legal  title  to  their  fund  as  a  trustee  for 
the  creditors."  The  question  of  comity  was  considered  in  this 
case,  but  that  has  been  eliminated  by  the  Converse  decision  and 
none  of  any  of  the  cases  dispute  the  competency  of  the  receiver 
as  trustee  to  bring  the  proper  action  elsewhere.  We  suggest 
that  no  question  of  comity  may  be  found  which  would  attempt  to 
deny  the  right  of  the  legal  owner  of  a  right  of  action  to  sue, 
whatsoever  it  might  say  as  to  his  cause  of  action,  if  constitution- 
ally his  privileges  and  immunities  as  a  citizen  may  be  invaded  at 
all.  At  all  events  the  Federal  Supreme  Court  reversed  the  Wis- 
consin courts,  when,  if  it  had  power  for  any  reason  to  sustain 
their  ruling  to  deny  admission  to  its  tribunals,  it  might  have 
sustained  it.  Instead  it  said  this  "quasi  assignee"  or  trustee 
could  compel  the  Wisconsin  courts  to  entertain  his  suit.30 

§  105.  Trustee  of  Express  Trust  Distinguished  from  Statu- 
tory Trustee. — It  is  stated  in  Cyc.31  that:  "Strictly  speaking, 
a  trustee  deriving  his  power  from  statute  or  judicial 
appointment  cannot  as  of  right,  maintain  an  action  in 
comity  outside  of  the  jurisdiction  of  his  appointment,  and  the 
tendency  of  the  courts  in  earlier  times  was  to  refuse  to  enter- 
tain such  actions."  How  far  this  general  statement  is  subject 
to  qualification  by  reason  of  the  force  and  effect  of  the  faith 

28Howarlh   v.  Angle    (1900),    162   N.    Y.    179.   186,   56   N.    E.   489, 
47  L.  R.  A.  725. 

29Howarth  v.  Lombard  (1900),  175  Mass.  570,  579,  56  N.  E.  888, 
49    L.   R.  A.   301. 

30See  also  Glenn  v.  Soule  (1884),  22  Fed.  417;  Glenn  v.  Williams 
(1882),  60   Md.   93,   119. 

SI  39  Cyc.  449. 

151 


§   105.]  RIGHT  TO  SUE  IN   FOREIGN  STATE.  [CHAP.   XIV. 

and  credit  clause  of  the  United  States  Constitution  it  would  be 
merely  academic  here  to  inquire.  It  is  only  desired  to  fur- 
ther accentuate  the  fact  that  it  is  impliedly  admitted  in  the  above 
excerpt  that  a  trustee  of  an  express  trust  may  "as  of  right" 
maintain  an  action  in  foreign  courts.  Thus  in  an  early  case32  an 
action  was  brought  by  a  trustee  in  which  he  recovered.  While 
the  case  was  pending  on  appeal  the  trustee  died  and  the  question 
arose  in  whose  name  should  the  appeal  be  revived.  The  law  of 
Alabama  was,  that  death  required  the  substitution  of  a  new 
trustee,  while  in  Georgia  where  the  trust  was  created  the  com- 
mon law  was  presumed  to  prevail  and  his  personal  representa- 
tive would  succeed  him.  It  was  said  that  law  was  confined  to 
Georgia  and  a  trustee  should  be  appointed  in  Alabama,  in  whose 
name  the  appeal  could  be  revived. 

A  California  case  held  that  as  a  matter  of  comity  a  statutory 
foreign  trustee  should  be  allowed  to  sue  in  its  Courts,  if  the 
rights  of  domestic  creditors  were  not  interfered  with,33  a  hold- 
ing which  if  not  overcome  by  the  ruling  in  Converse  v.  Hamil- 
ton, supra,  yet  goes  no  further  than  as  above  expressed.  It 
compares  such  trustees  to  "foreign  receivers  and  like  officers." 

In  a  Washington  case34  we  find  the  excerpt  taken  from  Cyc. 
and  the  question  was  whether  the  plaintiff  "as  trustee"  could 
maintain  the  action.  It  was  held  he  could  because  of  comity. 
It  would  appear  from  other  cases,  that  it  was  doubtful  whether 
plaintiff  was  a  statutory  trustee  but  he  was  so  regarded.  He  is 
spoken  of  as  an  "officer"  and  he  was  appointed  substitute  trus- 
tee by  the  court.  In  Glenn  v.  Williams35  a  substituted  trustee 
though  the  substitution  be  by  decree  of  court,  was  regarded  as 
standing  like  the  original  trustee,  the  decree  operating  like  an 
appointment.  It  was  upon  this  very  distinction  he  was  held 

32McDougald's  Admr.  v.  Carey  (1862),  38  Ala.  320. 

33Iowa  &  Cal.  Land  Co.  v.   Hoag  (1901),  132  Cal.  627,  64  Pac. 
1073. 

34Fidelity    Ins.  T.  &  S.  D.  Co.  v.  Nelson   (1902),  30  Wash.  340, 
70   Pac.   961. 

35  Supra, 
152 


CHAP.   XIV.]  PARTIES.  [§   106. 

to  have  the  right  to  sue  abroad.  This,  however,  seems  all  ob- 
viated by  the  logic  of  the  ruling  in  the  Converse  cases,  the  faith 
and  credit  clause  putting  a  receiver  who  is  "quasi  assignee" 
in  the  position  of  a  trustee  appointed  by  the  owner  of  property. 

A  very  elaborate  discussion  of  this  comity  rule  is  found  in 
an  Ohio  case36  and  at  bottom  it  goes  upon  the  theory  that  a 
statute  and  an  order  of  court  having  no  extraterritorial  opera- 
tion, outside  at  least  of  the  faith  and  credit  clause,  does  not 
bind  property  elsewhere.  If  this  is  the  true  basis  of  appeal  to 
comity,  it  is  easily  understood  in  what  way  a  trustee  under  ap- 
pointment of  an  owner  of  property  needs  no  more  of  comity  for 
bringing  a  suit  abroad  than  an  ordinary  holder  of  a  promissory 
note.  One  status  is  based  on  jus  disponendi,  the  other  on  con- 
tract and  in  final  analysis  the  two  are  the  same,  while  a  statutory 
assignee  or  trustee  may  take  in  invitum?1  and  the  law  of  his 
title  be  local. 

§  106.  Action  Where  Trustee  Merely  Binds  Trust  Estate. — 
Under  the  broad  language  of  .Chief  Justice  Waite  we  have 
quoted,38  it  cannot  be  seen,  that  there  would  be  any  difference 
of  venue  in  personal  jurisdiction,  where  a  trustee  stipulates  for 
exemption  from  personal  liability  and  where  he  does  not.  He 
may  be  sued  alone  without  joining  the  cestuis  que  trust,  in  the 
one  case  as  the  other,  because  it  is  by  virtue  of  his  being  in- 
vested with  powers  that  he  becomes,  so  to  speak,  their  alter  ego, 
their  personal  representative  as  a  principal. 

It  might  be  that  a  court  in  its  discretion  might  direct  that  a 
cestui  que  trust  be  brought  in,  because  his  personal  interests 
might  be  affected,  but  failure  to  make  him  such  in  the  first  in- 
stance would  not  be  jurisdictional.  Thus  in  a  trust  not  em- 
barked in  trade  and  subject  to  none  of  its  vicissitudes,  and  the 
sole  duty  of  the  trustees  was  to  set  aside  so  much  of  testator's 
property  as  would  produce  a  certain  annual  income  and  pay 
that  over  to  the  support  and  maintenance  of  testator's  insane 

36Bank  v.  McLeod  (1882),  38  Ohio  St.  174. 
37Matter  of  Waite  (1885),  99  N.  Y.  433. 
*&Ante    §  101. 

153 


§  108.]  CONCLUSION.  [CHAP.  xiv. 

daughter,  in  a  suit  to  subject  the  trust  fund  to  money  bor- 
rowed by  the  trustees,  it  was  held  that  upon  the  case  being  re- 
manded on  a  reversal,  a  guardian  ad  litem  to  represent  her, 
would  after  the  service  upon  her,  be  appointed,  as  her  personal 
interests  may  be  affected  by  the  proceedings.39 

It  is  easily  conceived,  however,  that  this  would  be  vastly 
different  where  a  trust  instrument  expressly  provides,  that  a 
trustee  may  exempt  himself  from  personal  liability  and  is 
given  the  power  to  bind  directly  the  assets  of  a  trust  for  his  acts 
and  contracts. 

§  107.  Actions  by  Cestuis  Que  Trust. — In  actions  by  cestuis 
que  trust  against  trustees  for  breach  of  trust  the  personal,  in- 
stead of  the  representative,  character  of  the  trustee  again  ap- 
pears. Thus  it  has  been  ruled,  that  if  several  trustees  are  im- 
plicated in  a  common  breach  of  trust,  for  which  a  cestui  que 
trust  seeks  relief  in  equity,  he  may  sue  all  or  any  one  or  more  of 
them,  at  his  election.40 

Blatchford,  D.  J.,  said  this  was  a  well  settled  rule  and  was 
upon  the  theory  of  a  tort  being  treated  as  several  as  well  as 
joint.  This  was  called  an  exception  to  the  general  rule  that  in 
a  proceeding  against  trustees  all  must  be  made  parties.41  We 
have  indicated  hereinbefore  the  liability  of  trustees  to  cestuis 
que  trust  and  under  what  circumstances  they  may  be  sued  at 
law.42 

§  108.  Conclusion. — There  are  many  cases,  which  might 
have  been  cited  and  discussed  were  this  a  more  general  treatise 

39Ring  v.   Stowell   (1912),    (Mass.)   98   N.    E.  91. 

•*OHeath  v.  Erie  Ry.  Co.  (1871),  8  Blatchf.  347,  Fed.  Cas.  6306; 
See  Holmes  v.  McDonald  (1907),  226  111.  169,  80  N.  E.  714,  where 
only  some  of  the  trustees  were  sued. 

4lCunningham  v.  Pell  (1836),  5  Paige  (N.  Y.)  607.  It  has  been 
said  that  all  trustees  should  be  joined  so  as  to  adjust  liabilities  of 
co-trustees  and  to  avoid  future  litigation.  Hutchinson  v.  Ayres 
(1886),  117  111.  558,  7  N.  E.  476. 

42  Ante  §  85. 
154 


CHAP.   XIV.]  CONCLUSION.  [§    108. 

in  regard  to  trusts.  As,  however,  it  is  of  a  particular  character 
of  trusts,  it  has  been  endeavored  to  consider  only  such  as  may 
seem  to  bear  some  relationship  or  furnish  some  analogy  to  ques- 
tions that  may  concern  these  particular  trusts.  That  the  rem- 
edy at  law  should  more  generally  apply  to  them  than  other 
trusts  may  be  readily  thought,  because  the  personality  of  the 
trustee  in  these  trusts  stands  out  in  greater  relief,  and  his  status 
as  that  of  general  owner  is  more  strongly  emphasized,  and  then 
the  rule  of  convenience,  arising  out  of  the  similitude  of  trust 
interests,  represented  by  transferable  certificates,  to  those  in 
a  corporation,  implies  it  was  never  intended,  that  any  others 
than  trustees  need  be  made  parties  in  law  or  equity,  unless  at 
least  the  integrity  of  a  trust  itself  is  threatened. 


155 


CHAPTER  XV. 
TAXATION. 

§  109.  Preliminary. — It  has  been  demonstrated,  it  is  here  as- 
sumed, that  interests  in  a  trust  are  subject  to  levy  and  sale,  and 
assignable  at  the  will  of  the  owner,  generally  speaking,  and 
especially  so,  when  by  the  instrument  creating  the  trust  such 
interests  are  represented  by  transferable  shares.  It  becomes, 
therefore,  needful  to  inquire  how  a  business  carried  on  by  means 
of  a  trust  agreement  stands,  in  comparison  with  other  arrange- 
ments for  the  conduct  of  business,  so  far  as  the  assessment  of 
taxes  are  concerned.  The  federal  corporation  tax,  resting  upon 
the  exercise  of  a  privilege  should  be  taken  out  of  the  review 
proposed  to  be  made  of  the  general  subject  of  taxation,  so  far 
as  needed  in  its  particular  bearing  on  trust  estates  and  their 
beneficiaries.  It  needs  to  be  noticed,  however,  by  way  of 
demonstrating  that  a  business  trust  has  at  least  one  important 
consideration  in  its  favor  as  compared  with  a  corporation. 

§  110.  Excise  Taxes. — Exemption  of  Trusts  From  Federal  Cor- 
poration Tax. — This  part  of  the  subject  of  this  chapter  briefly 
may  be  covered  by  allusion  to  and  quotation  from  the  corporation 
tax  decisions.  Two  cases  were  disposed  of  by  one  of  these  de- 
cisions.1 One  of  these  was  of  a  so-called  "real  estate  trust."  By 
the  instrument  creating  it  trustees  were  vested  with  the  title  to 
certain  lands  and  buildings  in  Boston,  with  absolute  control  and 
authority  over  same,  with  right  to  sell  for  cash  or  credit  and  to 
manage  for  the  best  interest  of  shareholders.  Dividends  were 
to  be  paid  from  income  or  net  proceeds.  The  existence  of  the 
trust  was  to  be  twenty  years  after  the  termination  of  lives  in 
being,  and  the  property  then  held  was  to  be  sold  and  the  pro- 
ceeds of  sale  divided  among  the  then  shareholders.  These 
shareholders  were  to  receive  shares  of  the  par  value  of  $100., 
lEliot  v.  Freeman  (1911),  220  U.  S.  178. 
156 


CHAP.    XV.]    •  EXCISE   TAXES.  [§    110. 

according  to  the  investment  of  each.  Transferees  of  shares  were 
to  receive  new  certificates  upon  surrender  of  certificates  of 
shares  belonging  to  transferrors.  No  shareholder  was  to  have 
any  legal  title  to  or  interest  in  the  trust  property  nor  any  right 
to  call  for  partition.  It  was  also  provided  that  the  trust  might 
be  terminated  at  any  time  by  an  instrument  in  writing  signed 
by  not  less  than  three-fourths  of  the  value  of  stock  held  by 
shareholders.  The  instrument  also  provided  for  meetings  of 
shareholders.  The  trust  owned  one  building  leased  to  a  single 
tenant  and  an  office  building  with  elevator  service,  janitor  serv- 
ice, etc. 

The  other  was  called  a  "Department  Store  Trust,"  formed  for 
the  purpose  of  purchasing  and  holding  certain  parcels  of  land, 
also  in  Boston,  and  erecting  a  building  thereon  for  a  depart- 
ment store.  This  had  similar  provisions  to  the  other,  with 
power  given  shareholders  to  hold  annual  meetings  and  by  a 
majority  to  elect  and  depose  trustees  and  to  alter  and  amend 
the  terms  of  the  trust  agreement. 

The  opinion  said:  "The  two  cases  now  under  consideration 
embrace  trusts  which  do  not  derive  any  benefit  from  and  are  not 
organized  under  the  statutory  laws  of  Massachusetts.  *  *  *  *  En- 
tertaining the  view  that  it  was  the  intention  of  Congress  to  em- 
brace within  the  corporation  tax  statute  only  such  corporations 
and  joint  stock  associations  as  are  organized  under  some  statute, 
or  derive  from  that  source  some  quality  or  benefit  not  existing 
at  the  common  law,  we  are  of  opinion  that  the  real  estate  trusts 
involved  in  the  two  cases  are  not  within  the  terms  of  the  act." 

As  showing  that  the  feature  of  these  two  trusts  being  "real 
estate"  trusts  had  nothing  to  do  with  their  being  declared  not 
subject  to  the  corporation  tax,  another  of  these  corporation  tax 
decisions  is  greatly  in  point.2  In  that  case  it  was  held  that  a 
corporation  whose  sole  purpose  was  to  hold  title  to  a  single 
parcel  of  real  estate  subject  to  a  long  lease  for  the  mere  con- 
venience of  its  stockholders,  for  receiving  and  distributing  the 

2Zonne  v.  Minneapolis  Syndicate   (1911),  220  U.  S.  187. 

157 


§    110.]  EXCISE    TAXES.  •  [CHAP.     XV. 

rentals  from  such  lease,  was  not  subject  to  the  corporation  tax, 
because  this  was  not  "doing  business  within  the  meaning  of  the 
law."  The  court,  however,  was  careful  to  say:  "The  corpora- 
tion involved  in  the  present  case,  as  originally  organized  and 
owning  and  renting  an  office  building  was  doing  business  within 
the  meaning  of  the  statute  as  we  have  construed  it."  Then  it 
stated  that:  "It  had  wholly  parted  with  control  and  manage- 
ment of  the  property;  its  sole  authority  was  to  hold  the  title 
subject  to  the  lease  for  130  years,  to  receive  and  distribute  the 
rentals  which  might  accrue  under  the  terms  of  the  lease  or  the 
proceeds  of  any  sale  of  the  land  if  it  should  be  sold." 

Therefore,  from  the  two  decisions  it  is  to  be  inferred,  that 
though  the  two  real  estate  trusts  were  doing  business  in  such  a 
way  as  would  make  a  corporation  or  joint  stock  company  or- 
ganized under  a  statute  liable  to  the  tax,  yet  solely  and  only 
because  they  were  trusts  doing  this  business,  they  were  not  thus 
liable.  But  this  point  need  not  be  left  to  mere  inference  from 
judicial  reasoning,  because  in  the  main  decision  of  these  cor- 
poration tax  cases,3  specific  objection  was  made  that  certain 
corporations  were  "real  estate  companies,  whose  business  is 
principally  the  holding  and  managing  real  estate."  The  court 
said:  "We  think  it  is  clear  that  corporations  organized  for  the 
purpose  of  doing  business  and  actually  engaged  in  such  ac- 
tivities as  leasing  property,  collecting  rents,  managing  office 
buildings,  making  investments  of  profits,  or  leasing  ore  land  and 
collecting  royalties,  managing  wharves,  dividing  profits  and  in 
some  cases  investing  the  surplus,  are  engaged  in  business  within 
the  meaning  of  this  statute." 

A  word  of  caution  is  here  indulged  as  to  what  was  said  in 
Eliot  v.  Freeman,  supra.  The  court  said  Massachusetts  has  no 
statute  authorizing  the  formation  of  a  joint  stock  association, 
and,  therefore,  of  course  it  was  clear  that  the  trusts  considered 
could  not  derive,  even  if  the  trustors  had  wished  so  to  do,  any 
benefit  from  statute,  but  were  forced  to  depend  upon  the  com- 
mon law  for  whatever  rights  they  enjoyed.  A  few  states  have 

3Flint  v.  Stone  Tracy  Co.   (1911),  220  U.  S.  107. 
158 


CHAP.    XV.]  TAXATION.  [§    111. 

such  a  statute,  but,  as  has  been  shown,  such  a  trust  instrument 
does  not  need  its  aid  when  it  merely  provides  for  several  in- 
terests in  trust  capital  or  property.  That  these  interests  are 
represented  by  transferable  shares  does  not  make  their  owners 
associates,  as  has  been  shown.  Caution  should  be  used,  how- 
ever, not  to  form  a  business  trust  by  means  of  a  joint  stock 
association  statute,  if  avoidance  of  this  corporation  tax  is  to  be 
completely  assured. 

The  question  here  of  excise  tax  under  the  federal  statute  is 
greatly  different  from  that  of  excise  tax  under  the  Massachusetts 
constitution.  The  Judges  of  the  Supreme  Judicial  Court  of 
Massachusetts  held,  by  a  bare  majority,  that  an  excise  tax  could 
be  imposed  upon  a  privilege  which  is  the  exercise  of  a  natural 
right,  this  being  said  in  an  advisory  opinion  by  the  Justices  re- 
ported in  (1908)  196  Mass.  603.  The  whole  question  there  was 
what  was  a  taxable  commodity  under  the  Massachusetts  consti- 
tution. And  it  was  held  that  transferable  shares  represented  by 
certificates  were  such  commodities  both  when  issued  by  cor- 
porations and  by  voluntary  associations.  Three  of  the  Justices 
dissented  from  this  view,  holding  that  shares  in  a  corporation 
could  be  taxed,  but  those  of  an  association  could  not. 

§  111.  Trust  Taxable  to  Trustee  or  Beneficiary  and  Not  to 
Both. — In  a  New  Hampshire  case4  it  was  said:  "When  an 
owner  has  left  his  farm  in  trust  for  his  widow  and  children, 
and  the  trustee,  holding  the  legal  title  without  any  beneficial  in- 
terest pays  the  farm  tax  and  expenses  out  of  the  farm  income, 
and  pays  the  rest  of  the  income  to  the  widow  and  children,  a 
second  tax  for  the  same  amount  is  not  assessed  on  the  equitable 
title  of  the  widow  and  children.  For  the  purpose  of  taxation 
the  legal  title  of  the  trustee  and  the  equitable  title  of  the  widow 
and  children  are  not  more  than  the  whole  title,  legal  and  equit- 
able, which  the  testator  had  in  his  lifetime." 

Then  the  opinion  proceeds  in  a  manner  of  reasoning  peculiarly 
applicable  to  the  question  in  hand,  as  follows:  "And  if  the 

^Morrison  v.  Manchester  (1879),  58  N.  H.  538,  563. 

159 


§    111.]  TAXATION.  [CHAP.    XV. 

testator,  dividing  the  equitable  title  and  beneficial  interest  into 
four  shares,  gave  two  shares  to  his  widow  and  one  share  to  each 
of  his  two  children,  directed  the  trustee  to  issue  to  them  cer- 
tificates as  evidence  of  their  respective  rights  in  the  trust  prop- 
erty and  made  the  certificates  assignable  and  available  as  per- 
sonal property,  like  certificates  of  corporation  stock,  and  if  this 
disposition  of  his  property  were  authorized  by  law,  the  united 
titles  of  the  trustee  and  the  widow  and  children  would  not  be 
more  than  the  title  of  the  testator."  The  question  of  legal  and 
equitable  interests  in  such  an  estate  was  not  involved,  but  the 
court  was  using  premises  of  undoubted  correctness  for  the 
conclusion,  that  there  should  not  be  taxation  of  deposits  in  a 
savings  bank  both  upon  it  and  its  depositors.  Whether  the 
conclusion  follows  or  not,  the  premises  employed  are  incontro- 
vertible in  law. 

As  showing  that  a  trust  estate  would  be  inequitably  assessed, 
if  taxed  in  the  hands  of  the  beneficiary  when  also  taxed  to  the 
trustee,  this  same  court  said:  "When  a  testator,  having  a  son 
capable  and  a  daughter  incapable  of  managing  property,  leaves 
half  of  his  estate  to  the  son  and  the  other  half  in  trust  for  the 
daughter,  the  tax  of  the  whole  estate  is  not  thereby  increased 
one-half.  The  mere  trust  does  not  make  the  daughter's  share 
of  the  public  expense  twice  as  much  as  her  brother's;  and  the 
double  taxation  of  her  property  would  be  the  imposition  of  a 
penalty  for  a  misfortune."5  In  Maryland  the  principle  that 
there  cannot  be  two  taxes  on  a  trust  fund  was  recognized  and 
distinguished,  where  a  tax  on  savings  bank  deposits  was  sus- 
tained, as  follows:  "The  tax  imposed  on  the  deposits  in  Savings 
Banks  is  not  in  our  opinion  a  tax  on  the  property  held  by  such 
Banks  in  trust  for  the  depositors.  *  *  *  It  is  nothing  more  nor 
less  than  a  tax  on  the  Bank  itself,  upon  its  franchises  and  assessed 
in  consideration  of  the  privileges  conferred  by  the  State.  The 
average  deposits  during  a  specified  time  are  but  a  measure  of 
the  extent  to  which  such  institutions  have  exercised  their  fran- 
chises, the  basis  of  which  the  amount  to  be  paid  may  be  com- 
puted."6 

SRobinson  v.  Dover   (1880),  59  N.  H.  521,  528. 

6State  v.  Central  Savings  Bank  (1887),  67  Md.  290. 
160 


CHAP.    XV.]  TAXATION.  [§    111. 

A  savings  bank  case  was  considered  in  Massachusetts  under 
a  law  that  provided  that  depositors  were  exempt  from  direct 
taxation  on  the  amount  of  their  respective  shares.  It  was 
claimed  that  taxing  the  bank  on  deposits  was  to  nullify  this  ex- 
emption, but  the  Massachusetts  court  held,  that  the  tax  being 
levied  only  upon  average  deposits  showed  that  it  was  an  excise 
tax  upon  a  privilege  to  operate  a  savings  bank,  that  it  was  merely 
a  corporate  charge,7  the  court  arguing  away  constantly  from 
the  position  that  there  was  a  tax  on  a  trustee,  when  the  bene- 
ficial owner  had  been  exempted. 

This  holding  is  similar  to  that  by  the  Federal  Supreme  Court 
by  a  majority  of  six  to  three,8  and  ever  since  adhered  to,  that 
the  shares  of  the  capital  of  National  Banking  Associations  are 
subject  to  state  taxation  without  any  reference  to  the  amount 
of  such  capital  invested  in  non-taxable  bonds  of  the  United 
States.  It  was  considered  in  this  case  that  "the  tax  is  the  con- 
dition for  the  new  rights  and  privileges  conferred  upon  these 
associations."  Therefore,  if  there  is  a  common  law  right  in 
division  of  title  into  legal  title  and  equitable  interest,  there  is 
no  new  right  and  privilege  to  which  a  condition  of  taxation  may 
be  annexed,  as  specifically  held  in  Eliot  v.  Freeman,  supra.  This 
court  also  said  that  "shares  (of  stock)  are  a  distinct  independent 
interest  in  property  held  by  the  stockholders,"9  an  affirmation 
that  hardly  may  be  made  as  to  an  equitable  interest  in  a  trust; 
an  interest  in  these  business  trusts  that  has  its  source  purely 
in  contract  which  adds  nothing  to  the  intrinsic  value  of  the 
property  itself  or  puts  any  new  burden  on  the  taxing  power. 

In  an  early  Maryland  case  the  question  was,  whether  a  tax 
should  be  assessed  as  to  personal  property  at  the  residence  of 
the  trustee  or  where  the  cestuis  que  trust  resided,  there  being 
no  statute  specifically  providing  as  to  this.10  The  court  in 

^Commonwealth  v.   People's   Five   Cent   Savings   Bank   (1862),  5 
Allen  (Mass.)  428. 

8Van  Allen  v.  Assessors  (1865),  70  U.  S.   (3  Wall.)  573. 

SFarrington  v.  Tennessee   (1877),  95  U.  S.   679,  695. 

lOLatrobe   v.   Mayor,   etc.    (1862),   19   Md.   13;   Ames   Cases    on 
Trusts,  228. 

161 


§    111.]  TAXATION.  [CHAP.    XV. 

reaching  the  conclusion  that  the  tax  was  to  be  assessed  at  the 
residence  of  the  trustee  said,  that  when  the  trustee  paid  the 
taxes  "the  obligation  of  one  entitled  to  the  beneficial  interest 
of  property  held  by  a  trustee,  to  contribute  to  the  public  taxes, 
according  to  actual  worth,  is  none  the  less  satisfied,  for  in  such 
a  case  the  assessment  of  the  tax  to  the  holder  of  the  legal  estate, 
through  him  reaches  and  fastens  upon  the  interest  of  the  bene- 
ficial owner,"  a  statement  that  is  wide  of  the  mark  as  to  tax- 
ation of  a  corporation,  because  "shares  are  a  distinct,  inde- 
pendent interest  or  property  held  by  the  stockholder." 

A  New  York  case  in  holding  that  a  trustee  not  in  possession, 
the  beneficiary  being  a  non-resident,  was  not  to  be  assessed  be- 
cause of  his  legal  title,  said:  n  "Generally  a  man  is  not  spoken 
of  as  the  owner  of  property,  who  merely  holds  it  as  a  trustee 
and  in  a  representative  capacity.  He  has  the  legal  title,  and 
he  is  assessed  for  it  when  it  is  within  the  state,  but  this  is  by 
express  provision  of  statute,  and  such  provision  is  not  men- 
tioned in  the  case  of  a  trustee,  whose  trust  property  is  outside 
of  the  state  and  not  in  his  possession."  Then  referring  to  cus- 
tody in  the  state  making  the  property  assessable  there,  the 
court  says:  "The  statute  as  it  is  may  lead  to  injustice  in  the 
double  taxation  of  personal  property,  once  to  its  absolute  owner 
and  again  in  the  hands  of  his  agents  in  the  shape  of  securities 
in  their  custody  and  control  in  other  states."  This,  however, 
would  not  be  double  taxation  in  the  case  of  corporate  capital  and 
shares  therein  being  taxed. 

The  usual,  if  not  universal,  method  in  taxation  statutes  is  to 
group  holders  of  property  in  irust  in  some  such  manner  as  the 
Rhode  Island  statute  does,  as  follows:  "All  personal  property 
held  in  trust  by  any  executor,  administrator  or  trustee,  the  in- 
come of  which  is  to  be  paid  to  any  other  person,  shall  be 
assessed  against  the  executor,  administrator  or  trustee"  etc.  It 
would  seem  no  more  abhorrent  to  equity  and  justice  and  consti- 
tutional provisions  against  double  taxation  to  tax  property  to 
an  executor  or  administrator  and  again  to  legatees  and  heirs 
UPeople  ex  rel.  Darrow  v.  Coleman  (1890),  119  N.  Y.  137,  140, 
23  N.  E.  488,  7  L.  R.  A.  407. 
162 


CHAP.    XV.]  TAXATION.  [§ 

than  to  trustee  and  cestui  que  trust,  and  statutes  in  this  grouping 
seem  thus  to  view  the  matter.  It  was  claimed  that  the  Rhode 
Island  statute  made  it  possible  for  a  resident  cestui  que  trust 
to  escape  taxation  by  appointing  a  non-resident  trustee.  This 
was  admitted,  but  the  court  said:  "It  is  fair  to  suppose  that  the 
State  intends  to  allow  to  other  states  the  same  right  which  it 
claims  for  itself  and  does  not  contemplate  a  double  taxation."12 
If  this  does  not  mean  it  would  be  double  taxation  to  tax  the 
trustee  in  one  place  and  the  cestui  que  trust,  then  it  is  difficult 
to  find  that  it  has  any  bearing  upon  the  objection  that  was  urged. 

In  a  Maine  case13  where  non-resident  trustees  were  appointed 
by  a  will,  the  residence  of  beneficiaries  was  held  to  give  no 
right  to  tax  property  in  the  hands  of  the  trustees,  the  statute 
being  like  that  of  Rhode  Island,  the  court  saying  it  "could 
not  affect  trustees  and  property  thus  situated,"  saying  also: 
"We  do  not  hold,  however,  that  the  assessors  of  Augusta  cannot 
assess  a  tax  directly  against  the  annuitants  resident  in  Augusta 
for  their  annuities  or  other  interests  arising  out  of  the  trust." 
It  was  also  said  the  trustees  "could  not  be  made  amenable  to 
the  taxing  powers  of  this  state,  since  neither  they  nor  their 
property  were  within  the  state  or  subject  to  its  jurisdiction." 
For  this,  reliance  is  placed  upon  federal  authority,14  where 
it  is  said:  "No  principle  is  better  settled  than  that  the  power 
of  a  state,  even  its  power  of  taxation,  in  respect  to  property,  is 
limited  to  such  as  is  within  its  jurisdiction." 

§  112.  Taxing  Resident  Beneficiaries  of  Foreign  Trusts. — 
Some  of  the  cases  above  discussed  show  that  resident  benefici- 
aries were  held  non-taxable  as  to  their  interests  in  a  trust,  the 
property  of  which  was  in  the  hands  of  non-resident  trustees, 
but  that  holding  was  according  to  the  form  of  the  statute,  the 
last  of  these  cited  cases,  however,  seeming  also  to  say  that  such 
taxation  was  not  even  within  state  power,  except  that  an  annuity 
could  be  taxed,  which  also  would  be  true  had  the  trustees  been 
resident  trustees. 

12Anthony  v.  Caswell  (1885),  15  R.  I.  159.  But  see  Hunt  v. 
Perry  (1896),  165  Mass.  287,  43  N.  E.  103. 

iSAugusta  v.  Kimball  (1898),  91  Me.  605,  40  Atl.  666. 

"Erie  Railroad  v.  Pennsylvania   (1894),  153  U.  S.  628,  646. 

163 


§    112.]  TAXATION.  [CHAP.    XV. 

In  Michigan  the  constitution  prohibits  double  taxation  and 
it  was  claimed  that,  as  this  prohibited  taxing  a  domestic  cor- 
poration and  the  holders  of  its  stock,  so  it  prohibited  taxing 
residents  on  stock  in  a  non-resident  corporation  taxed  upon  its 
property  outside  of  the  state.  The  court  by  a  majority  of  four 
to  one  held  that  the  inhibition  against  double  taxation  only 
applies  to  such  taxation  within  the  state,  and  as  stock  has  its 
situs  at  the  domicile  of  its  owner  and  is  there  taxed  once,  it 
stands  on  an  equality  with  stock  in  a  domestic  corporation  also 
taxed  but  once.15 

In  a  later  case16  this  same  court  admitted  there  was  a  tech- 
nical reason  for  saying  that  taxes  are  not  levied  on  the  same 
property  when  levied  on  capital  and  upon  corporate  shares 
therein,  but  this  was  not  true  in  the  sense  of  a  constitutional 
inhibition  of  double  taxation,  and,  therefore,  where  all  of  a 
foreign  corporation's  property  was  located  in  Michigan  and 
there  assessed,  shares  of  stock  owned  by  its  residents  could  not 
be  assessed. 

A  Pennsylvania  case17  illustrates  very  forcibly  the  theory 
that  the  taxable  interest  in  a  trustee  is  purely,  solely  and 
indistinguishably  but  a  representation  for  taxing  purposes  of 
the  property  of  cestuis  que  trust.  Thus  a  trustee  residing  in 
a  borough  in  Pennsylvania  was  held  liable  for  a  state,  but  not 
for  a  borough,  tax,  on  the  theory  that  "the  inhabitancy  of  the 
owner  is  made  the  test  of  taxableness  for  borough  purposes." 
The  court  said:  "It  would  be  a  cruel  and  absurd  law  that  should 
subject  the  trust-moneys  of  non-resident  orphans  to  borough 
taxation,  merely  because  their  trustee  resided  in  the  borough. 
For  state  purposes  it  is  right  enough  to  tax  them,  because  the 
safety  and  value  of  the  funds  depend  on  the  existence  of  the 
government,  which  such  taxes  go  to  support,  and  possibly 
something  of  the  same  reason  may  apply  in  behalf  of  county 
taxation,  but  what  protection  or  value  does  the  borough  of 

iSBacon  v.  Board  of  Comrs.  (1901),  126  Mich.  22,  85  N.  W.  307. 
iSStroh  v.  City  of  Detroit  (1902),  131  Mich.  109,  90  N.  W.  1029. 
"Borough  of  Carlisle  v.  Marshall   (1860),  36  Pa.  397,  402. 
164 


CHAP.    XV.]  TAXATION.  [§    112. 

Carlisle  give  to  funds  invested  in  Philadelphia?  The  inhabi- 
tants have  an  interest  in  the  municipal  government  and  are 
lawfully  taxed  to  support  it,  but  these  taxes  should  be  paid  out 
of  their  own  property,  not  out  of  property  existing  in  Phila- 
delphia, and  owned  by  inhabitants  of  New  York." 

The  theory  of  a  tax  being  assessable  against  a  trustee  only 
because  property  to  which  he  holds  legal  title  is  benefited  by 
the  laws  of  his  domicile  also  finds  illustration  in  a  late  de- 
cision by  the  Sixth  Circuit  Court  of  Appeals.18  The  trustee  in 
that  case  was  a  resident  of  Ohio  and  the  cestui  que  trust  re- 
sided in  Connecticut,  where  the  trustee  was  appointed.  The 
property  consisted  of  stocks  and  bonds  deposited  with  a  bank 
and  trust  company  in  New  York,  which  collected  dividends  and 
interest  and  remitted  to  the  trustee,  who  in  turn  remitted  to 
the  cestui  que  trust,  deducting  for  his  services,  $300.00  per 
year.  The  trustee  was  held  not  taxable  under  an  Ohio  statute 
which  provided  that  "all  property  whether  real  or  personal  in 
this  state  *  *  *  and  all  moneys,  credits  and  investments  in  bonds, 
stocks  and  otherwise  of  persons  residing  in  this  state  shall  be 
subject  to  taxation." 

The  decision  relied  on  a  leading  federal  case,19  which  said: 
"The  power  of  taxation  *  *  *  is  necessarily  limited  to  subjects 
within  the  jurisdiction  of  the  State.  These  subjects  are  persons, 
property  and  business,"  and  upon  an  Ohio  case20  construing 
that  statute  as  referring  to  tangible  property,  real  or  personal, 
in  the  State  and  "all  intangible  property  of  persons  residing  in 
this  State,  irrespective  of  where  the  subject  of  the  property 
may  be  situated."  But  the  federal  court  thought,  that  as  to 
intangible  property  "the  person  taxed  must  be  in  the  jurisdiction 
of  the  state,  not  only  personally,  but  officially,  in  the  capacity 
in  which  he  is  taxed  and  in  that  capacity  must  be  enjoying  the 
benefits  of  the  laws  of  the  jurisdiction."  "In  the  case  of  a 

ISGoodsite  v.   Lane    (1905),   139   Fed.  593,  72  C.   C.  A.  281. 
iSState  Tax  on  Foreign-Held  Bonds  (1872),  82  U.  S.  (15  Wall), 
300,  319. 

20Myers  v.  Seaberger  (1887),  45  Ohio  St.  232,  235,  12  N.  E.  796. 

165 


§  113.]  TAXATION.  [CHAP.  xv. 

trustee,  he  must  be  exercising  his  office  of  trustee  within  the 
state,  and  be  enjoying,  as  trustee,  privileges  of  value  to  the 
estate,  for  which  it  is  just  the  estate  should  pay."  The  court 
further  said:  "An  examination  of  the  cases  will  show,  that 
where  this  tax  has  been  sustained,  either  the  trust  estate  or  the 
beneficiary,  or  the  trustee,  as  trustee,  was  receiving  benefits  from 
the  State,  for  which  it  was  only  fair  the  trustee  should  pay." 
All  of  the  trust  property  being  intangible  it  was  held  non-tax- 
able to  the  trustee  residing  in  Ohio. 

One  need  not  agree  with  all  of  the  reasoning  in  this  case 
nor,  under  the  facts,  with  its  conclusion,  but  there  seems  much 
reason  for  holding  that  the  state's  jurisdiction  over  a  person  for 
taxing  purposes  may  be  broader  than  over  one  holding  merely 
the  legal  title  but  not  the  beneficial  interest.  Therefore,  while 
tangible  property  may  be  taxed  because  of  location,  intangible 
property  should  not  be  taxed  to  a  trustee  under  the  rule  mobilia 
sequuntur  personam.  Such  is  the  necessary  principle  to  be  fol- 
lowed, if  double  or  triple  or  more  greatly  multiplied  taxation  is 
to  be  avoided,  where  there  are  more  trustees  than  one,  with  each 
residing  in  a  different  jurisdiction.  Authority  is  abundant  that 
the  trust  property  will  be  taxed  upon  some  pro  rata  plan  that 
will  not  subject  the  entire  estate  to  more  than  a  single  tax.  If 
separate  tangible  possession  exists  the  tax  will  be  proportional 
in  amount,  and  if  it  cannot,  each  trustee  will  be  taxed  one-half 
or  one-third  or  other  fractional  part  according  to  their  num- 
ber.2 i 

§  113.  Massachusetts  Legislation. — Massachusetts  statute, 
pursuing  the  theory  that  the  beneficiary  is  the  true  owner  and 
trust  property  ought  to  be  taxed  accordingly  as  he  derives  bene- 
fit, both  from  the  state  and  its  municipal  divisions  without  re- 
gard to  the  particular  residence  of  the  holder  of  the  legal  title, 

21Hardy  v.  Yarmouth  (1863),  6  Allen  (Mass.)  277;  State  v. 
Matthews  (1859),  10  Ohio  St.  431;  Baltimore  v.  Stirling  (1868),  29 
Md.  48;  Baltimore  Appeal  Tax  Court  v.  Gill  (1878),  50  Md.  377;  Stin- 
son  v.  Boston  (1878),  125  Mass.  348;  People  ex  rel.  Darrow  v.  Cole- 
man  (1890),  119  N.  Y.  137,  23  N.  E.  488,  7  L.  R.  A.  407. 
166 


CHAP.  XV.]  TAXATION.  [§  113. 

requires  it  to  be  taxed  to  the  trustee  in  the  city  or  town  where 
the  beneficiary  resides,  and,  if  he  is  a  non-resident,  then  where 
the  trustee  resides,  and,  if  there  is  more  than  one  trustee  resid- 
ing in  different  places,  in  equal  portions.22  Scarcely  might 
legislation  more  specifically  declare  that  the  law  regards  the 
beneficiary  as  the  true  owner,  owing  both  general  and  local 
taxes  in  that  capacity,  if  a  resident,  and,  if  a  non-resident,  there 
is  a  presumption  of  benefit  to  him  from  general  and  local  muni- 
cipal law,  according  to  the  residence  of  Ithe  trustee.  This 
statute  was  before  the  Supreme  Judicial  Court  of  Massachusetts 
upon  the  question  whether  certificate  holders  in  a  trust  were 
taxable  at  their  residences  or  at  the  place  where  the  business  was 
carried  on.23  The  court  said :  "If  the  certificate  holders  in  this 
trust  are  partners  within  the  meaning  of  section  21  of  chapter 
490,  Part  1  of  Mass.  Statutes,  1909,  their  property  was  all  tax- 
able in  the  City  of  Boston,  where  their  business  was  carried  on," 
and  "we  do  not  think  the  provision  exempting  the  certificate 
holders  from  personal  liability  for  debts  should  be  held  to  de- 
feat the  application  of  this  section  to  the  trust  as  a  partnership. 
*  *  *  In  the  leading  and  substantive  features  that  distinguish 
ordinary  partnerships,  this  association  is  within  the  spirit  and 
meaning  of  the  law  of  partnership.  The  limitations  upon  the 
power  and  liability  of  individual  members,  and  the  attempt  to 
avail  themselves  of  many  of  the  privileges  of  stockholders  in 
corporations,  relate  more  to  details  and  to  the  machinery  of 
management  than  to  the  substantive  purposes  of  the  enterprise. ' 
The  "substantive  purposes"  were  to  carry  on  a  business  and 
a  business  ought,  under  the  statute,  to  be  taxed  where  it  is 
carried  on,  and,  if  various  persons  establish  it  and  it  is  carried 
on  for  their  benefit,  the  court  thought  they  were  partners  for 
taxing  purposes.  Had  the  court  been  at  all  disposed  to  dispute 
the  validity  of  the  exemption  from  liability  there  would  have 
been  a  much  briefer  answer  to  the  contention,  but  on  the  con- 
trary, it  admits,  or  seems  strongly  to  admit  the  validity  of 
"limitations  upon  the  power  and  liability  of  individual  mem- 

22Mass.  St.  1909,   c.  490,  §   23,  cl.  5. 

23\Villiams  v.  Boston  (1911),  208  Mass.  497,  94  N.  E.  808. 

167 


§    114.]  TAXATION.  [CHAP.    XV. 

bers"  and  speaks  of  "the  attempt  to  avail  themselves"  of  other 
things. 

The  case  seems  strong  authority  for  the  proposition,  that,  if 
the  business  of  such  a  trust  is  taxable  where  it  is  located,  it 
would  be  double  taxation  to  tax  those  holding  certificates  of 
shares  therein.  Certainly  this  was  so  deemed  in  Massachusetts 
so  far  as  other  towns  and  cities  were  concerned.  In  other 
words,  though  the  Massachusetts  statute  provides  that  a  cestui 
que  trust  be  taxed,  through  his  trustee,  in  his  town  or  city,  yet 
a  certificate  holder  in  a  trust  need  not  be,  because  the  trust  is 
elsewhere  taxed,  the  substantive  purpose  being  to  carry  on  a 
business  for  the  benefit  of  investors. 

§  114.  Summary. — It  seems  impossible  to  find  any  case  main- 
taining or  attempting  to  maintain  the  proposition,  that  the  legal 
and  equitable  interest  in  the  same  property  may  both  be  taxed, 
at  least  where  trustee  and  beneficiaries  reside  in  the  same  state. 
On  the  contrary,  all  theory  of  this  being  lawful  as  to  capital 
stock  and  shares  of  stock  of  a  corporation  is  that  they  are 
distinct  and  independent  properties,  there  being  a  legal  interest 
in  the  former  and  a  legal  interest  in  the  latter,  that  is  to  say, 
diverse  legal  interests  in  different  things.  In  a  trust  there  is  a 
legal  interest  and  its  dependency,  an  equitable  interest.  If  the 
latter  is  destroyed  a  beneficiary  ceases  to  be,  but  the  property 
resumes  the  status  it  had  before  the  subsidiary  interest  began. 
Under  the  doctrine  of  limitation  of  power  in  the  State  to  tax 
property  only  within  its  jurisdiction,  as  expressed  in  State 
Tax  on  Foreign-Held  Bonds,  supra,  it  is  not  perceived  how  a 
resident  cestui  que  trust  may  be  taxed  as  to  his  interest  in  a 
foreign  trust,  if  no  tangible  property  thereof  is  found  at  his 
domicile.  His  interest  is  not  a  chose  in  action.  It  is  an  interest 
merely  represented  by  another  who  holds  the  legal  title  and 
lawful  possession.  If  he  could  be  taxed  on  tangible  personal 
property  elsewhere  lawfully  holden  and  taxable,  then  too  he 
would  be  taxable  on  real  estate  in  another  state.  As  to  intan- 
gibles the  rule  mobilia  sequuntur  personam  should  not  override 
the  legal  title  or  make  it  have  a  double  application.  Therefore, 
it  may  be  said  that  in  the  state,  where  both  trustee  and  cestui 
168 


CHAP.    XV.]  SUMMARY.  [§    114. 

que  trust  resides  one  tax  is  all  that  may  be  imposed ;  and  if  they 
reside  in  different  states  the  tax  is  imposed  where  the  property 
is  held.. 

If  it  is  true,  as  stated  in  Morrison  v.  Manchester,  supra,24 
that  there  is  no  difference  in  an  equitable  interest  whether  it  is 
merely  an  aliquot  part  or  represented  by  a  transferable  share 
therein,  then  it  also  would  be  true  that  a  state  may  not  discrim- 
inate by  exempting  the  former  and  taxing  the  latter  merely 
because  of  residence  of  the  owner,  even  if  it  may  tax  it  at  all. 
Every  state  guarantees  uniformity  in  taxation  and  equality  in 
burden.  This  may  not  be  absolute  in  practice,  but  it  must  be 
absolute  in  intention.  Therefore,  the  holder  of  a  transferable 
certificate  cannot  be  taxed  where  the  estate  is  elsewhere,  unless 
the  same  rule  is  applied  to  every  other  trust  interest  whether  it 
be  testamentary  or  otherwise  created. 


24  §  in. 

169 


CHAPTER   XVI. 
TRUSTEES  AS  MANAGERS. 

§  115.  Preliminary. — It  has  been  endeavored  thus  far  to 
demonstrate  that,  so  far  as  the  general  principles  of  equity  are 
concerned,  a  business  may  be  carried  on  by  means  of  the  vest- 
ing of  its  property  in,  and  transferring  its  control  to,  trustees, 
who  manage  same  under  their  duty  to  account  to  cestuis  que 
trust,  according  to  their  several  interests,  the  owners  of  these 
interests  having  alienable  rights  to  an  extent  making  the  holders, 
in  a  sense,  purely  impersonal.  Even  where  a  court  considered, 
that  owners  were  associated  in  a  company,  whose  property  was 
vested  in  trustees,  along  with  a  complete  surrender  of  its  man- 
agement and  control  and  the  trustees  distributed  its  profits  to 
certificate  holders,  by  original  constitution  and  by  purchase  of 
shares,  it  was  said  of  a  shareholder  that  "his  rights  were  re- 
duced (from  that  of  an  ordinary  member  of  a  company)  so 
that  the  stockholder  had  only  a  right  to  participate  in  the  elec- 
tion of  trustees  and  receive  his  share  of  the  money  made,"1 
and  the  trustees  "are  liable  for  their  fidelity  to  the  trust  and 
for  all  profits  made  in  business,  in  substantially  the  same  man- 
ner that  a  board  of  directors  is  liable  to  stockholders  in  an  in- 
corporated company."  The  particular  differences  in  this  liabil- 
ity, it  has  been  attempted  to  show,  are  that  in  equity  the  trustee 
liability  is  more  stringent,  while  operating  "in  substantially  the 
same  manner"  as  a  board  of  directors,  and  that  it  is  more  per- 
sonal as  to  each  trustee.  Nevertheless  for  trustees  to  conduct 
a  business,  agreements  and  declarations  of  trust  need  to  be 
framed  so  that  settlors  may,  mutatis  mutandis,  and  under  their 
common  law  powers,  create  a  trust  estate  to  be  managed  in  a 
practicable  way  to  the  attaining  of  the  end  desired. 

lEstate  of  Oliver  (1890),  136  Pa.  43,  59,  20  Atl.  527,  9  L.  R.  A. 
421,  20  Am.  St.  Rep.  894. 
170 


CHAP.    XVI.]  UNITY  OF   ACTION    BY   TRUSTEES.  [§    116. 

The  only  magic  in  the  creation  of  an  express  trust  is  the 
conveyance  of  a  legal  estate  to  one  competent  to  take  as  a 
trustee  for  the  benefit  of  one  capable  of  being  designated  a 
beneficiary.2  To  the  creation  of  such  trust  may  be  affixed  di- 
rections for  its  management  or  disposal.  Thus  a  will  may  au- 
thorize an  executor  as  trustee  to  carry  on  a  mercantile  business, 
so  that  debts  incurred  therein  may  become  chargeable  against 
the  trust  estate  and  so  endanger  its  existence,  provided  that  the 
power  so  to  do  be  unmistakably  expressed.3  And  the  directions 
prescribed  for  the  management  and  control  of  the  trust  may  not 
be  interfered  with  by  a  court  of  equity,  unless  the  preservation 
of  the  trust  itself  demands  such  interference.4  It  has  been  said 
that  there  is  "extreme  difficulty  in  applying  even  the  doctrine 
of  necessity  to  a  case  where  the  creator  of  the  trust  has  plainly 
disclosed  an  intent  to  limit  the  benefit  he  intended,  by  an  ad- 
herence to  a  course  of  conduct  expressly  mapped  out,  in  the 
management  of  a  trust."5 

From  these  cases  it  is  to  be  seen  that  the  trust  character  of 
property  is  in  no  respect  derogated  from  by  specific  directions 
governing  the  trustee,  holding  the  legal  title,  in  its  manage- 
ment, and  that  these  directions  sedulously  will  be  observed  by 
courts. 

§  116.  Unity  of  Action  by  Trustees. — The  maxim  potestas 
delegate,  non  delegari  potest  applies  to  the  office  or  power  of  a 
trustee.  Thus  in  a  declaration  of  trust  in  favor  of  shareholders 
in  a  tract  of  land  which  was  to  be  sold  by  the  trustee,  either 
wholly  or  as  to  such  portion  as  the  persons  holding  a  majority 
2Foster  v.  Friede  (1865),  37  Mo.  36;  Brown  v.  Spohr  (1904), 
180  N.  Y.  201,  73  N.  E.  14;  Estate  of  Smith  (1891),  144  Pa.  428,  27 
Am.  St.  Rep.  641. 

3Eufaula  National  Bank  v.  Manassas  (1899),  124  Ala.  379,  27 
So.  258;  Kirkman  v.  Booth  (1848),  11  Beav.  273;  Burwell  v.  Ca- 
wood  (1844),  43  U.  S.  (2  Howard)  560. 

4Johns  v.  Johns  (1898),  172  111.  472,  50  N.  E.  337. 

SPennington  v.  Metropolitan  Museum  of  Art  (1903),  65  N.  J. 
Eq.  11,  23,  55  Atl.  468. 

171 


§   116.]  TRUSTEES  AS   MANAGERS.  [CHAP.   XVI. 

of  the  shares  should  specify,  at  such  time  or  times  and  at  public 
or  private  sales  and  for  cash  or  convertible  securities,  and  upon 
such  notice  as  they  shall  direct,  Sandford,  Vice-Chancellor,  said: 
"The  instrument  contains  no  reservation  or  provision  of  a 
power  of  appointment  or  substitution  by  Graham,  of  any  per- 
son or  persons  to  do  these  acts  in  his  stead.  Upon  such  an 
instrument  delivered  to  each  shareholder,  each  appears  to  have 
paid  the  price  or  consideration  for  his  share.  Each  shareholder 
thus  acquired  a  right  and  interest  in  the  covenants  and  powers 
contained  in  the  declaration  of  trust.  The  powers  were  to  be 
executed  by  Graham  personally.  The  manner  of  their  execution 
was  important  to  the  parties  in  interest.  His  skill  and  success 
in  effecting  a  sale ;  his  economical  conduct  of  the  trust ;  and 
his  judgment  and  impartiality  in  making  a  partition,  if  that 
should  become  necessary,  were  elements  of  the  contract  which 
the  parties  entered  into  by  this  trust  deed,  and  which  the  court 
upon  the  construction  of  the  trust,  must  infer  were  a  part  of 
the  inducement  for  the  purchase  of  shares.  It  seems  to  me  per- 
fectly clear,  that  such  powers  cannot  be  delegated,  without  an 
express  provision  in  the  deed  creating  the  powers  or  the  con- 
sent of  all  the  parties."6 

This  somewhat  extended  extract  is  given,  because  it  is  an 
admirable  statement  and  shows  application  of  a  principle  to  a 
case  where  the  discretionary  powers  of  the  trustee  were  closely 
circumscribed,  and,  though  this  was  so,  yet  in  whatever  of  dis- 
cretion there  was  vested  in  him,  in  this  "each  shareholder  ac- 
quired a  right  and  interest,"  just  as  in  the  covenants  in  the 
declaration  of  trust. 

The  lack  of  power  of  substitution  or  delegation,  and  the  re- 
fusal of  a  court  of  equity  to  permit  same,  by  trustees  chosen 
by  a  testator,  though  a  proposed  substitution  might  appear  both 
to  them  and  to  the  court  as  more  practicable  toward  accomplish- 
ing the  purpose  aimed  at,  is  well  illustrated  in  a  Massachusetts 
case.7  This  case  shows  that  a  donor  gave  to  trustees  a  fund  to 

«Suarez  v.  Pumpelly  (1845),  2  Sandf.  Ch.   (N.  Y.)  336,  340. 
TWinthrop  v.  Attorney  General  (1880),  128  Mass.  253. 
172 


CHAP.    XVI.]  AGENTS    OF    TRUSTEES.  [§    116. 

found  and  maintain  a  museum  of  archeology,  with  the  fund  to 
be  divided  as  stated,  with  accumulation  as  to  one  part  for  a 
stated  time.  The  trustees  were  authorized  to  appoint  a  treasurer 
and  upon  his  resignation  it  was  sought  through  the  assistance 
of  the  court  to  turn  the  entire  management  of  the  trust  fund 
over  to  Harvard  University,  in  connection  with  which  the  mu- 
seum was  to  be  founded  and  maintained.  The  court  said:  "It 
is  a  departure  from  the  directions  of  the  donor,  which  could 
be  justified,  if  at  all,  only  upon  proof  of  the  most  pressing  ex- 
igency. But  the  only  reasons  assigned  by  the  plaintiffs  are  that 
their  treasurer,  who  has  acted  without  compensation,  is  about 
to  resign,  and  that  the  agreement,  if  made,  would  be  beneficial 
to  the  trusts,  as  it  secures  the  services  of  efficient  treasurers  and 
custodians  of  the  fund  without  charge,  whose  services  they 
could  not  otherwise  secure  without  great  expense." 

The  above  two  cases  are  but  illustrative  of  the  universally 
received  doctrine,  as  a  principle,  but  it  is  not  considered  to  be 
derogated  from  by  the  appointment  of  agents  for  the  perform- 
ance of  merely  ministerial  duties  incidental  to  a  proper  execu- 
tion of  the  trust,8  especially  when  express  authority  to  do  this 
is  given  by  the  instrument  creating  the  trust,9  a  subject  to  be 
considered  hereinafter.  It  necessarily  follows  that,  as  no  trustee 
can  delegate  to  another  any  part  of  his  discretionary  power, 
where  there  are  two  or  more  trustees,  they  must  act  as  a  unit 
and  not  separately.10  The  reason  for  this  rule  is  thus  expressed 
in  the  Coleman  case :  "The  power  of  sale  conferred  upon  trustees 
and  executrices  must  be  presumed  to  have  been  conferred  by 
reason  of  the  trust  and  confidence  reposed  in  them  by  the  testator, 
and  could  be  executed  only  by  all  those  upon  whom  it  was  con- 
ferred acting  jointly."  It  has  been  said  that  "this  principle  enters 

SSpenglar  v.  Kuhn  (1904),  212  111.  186,  72  N.  E.  214;  Donaldson 
v.  Allen  (1904),  182  Mo.  626,  81  S.  W.  1151;  Perry  on  Trusts  (6th 
Ed.)  Sec.  409. 

SWilson  v.  Stewart  (1858),  3  Phila.  (Pa.)  51. 

lOColeman  v.  Connolly  (1909),  242  111.  574,  90  N.  E.  278,  134  Am. 
St.  Rep.  347;  Hosch  Lumber  Co.  v.  Weeks  (1905),  123  Ga.  336,  51 
S.  E.,  439. 

173 


§   117.]  TRUSTEES  AS   MANAGERS.  [CHAP.   XVI. 

into  all  cases  depending  on  the  discretion  and  judgment  of  the 
trustees  in  contradistinction  to  acts  of  a  mere  ministerial  nature. 
The  former  requires  the  concurrence  of  all  the  trustees;  the 
latter  may  be  performed  by  one."11  The  case  here  cited  says 
each  trustee  has,  in  case  of  necessity,  an  inherent  power  to 
do  what  is  necessary  "to  the  continued  existence  of  the  trust,  at 
least,  in  the  absence  of  an  express  negative"  in  the  instrument 
creating  the  trust. 

§  117.  Provisions  for  Action  by  Less  Than  Full  Number. — 
Frequent  expression  is  made  of  an  exception  to  the  rule  of 
unity  arising  out  of  the  instrument  creating  the  trust,  but  this 
is  arguendo  and  where  made  it  is  done  by  way  of  illustrating 
the  strength  of  the  rule.  Thus  Chancellor  Walworth  said:12 
"A  trustee  who  has  only  a  delegated  discretionary  power  can- 
not give  a  general  authority  to  another  to  execute  the  same,  un- 
less he  is  specially  authorized  so  to  do  by  the  deed  or  will  cre- 
ating such  power."  And  it  has  been  held  that  where  the  instru- 
ment empowers  a  majority  to  act,  this  exception  to  the  general 
rule  will  not  be  enlarged  by  implication.13  However,  when 
there  is  action  by  a  majority  under  a  power  in  a  deed  or  will 
plainly  conferring  it,  such  action  has  been  upheld.14  And  so  it 
may  be  thus  conferred  on  one  of  two  trustees.15  though  it  is  true 
that  a  majority  may  act  where  the  deed  "by  a  reasonable  con- 
struction implies,  if  it  does  not  expressly  declare  the  power  and 
authority  of  a  majority  of  the  appellees  (trustees)  to  execute  its 
provisions."16  A  deed  or  will  also  may  classify  trustees,  assign- 
ing to  some,  certain  duties,  and  to  others,  other  duties,  though 
that  classification  be  not  absolutely  fixed  by  the  instrument,  but 

HVandever's  Appeal    (1845),   8   Watts   &  S.    (Pa.)    405,   42   Am. 
Dec.  305. 

12Hawley  v.  James   (1835),  5   Paige  318,  487. 

l3Bascom  v.  Weed   (1907),  105  N.  Y.  Supp.  459;   53   Misc.  Rep. 
496. 

14Barney  v.   Chittenden    (1849),   2    G.    Greene    (Iowa)    165;   At- 
torney General  v.  Cuming  (1843),  2  Y.  &  C.  Ch.  139. 

ISTaylor  v.  Dickinson   (1863),  15  Iowa  483. 

16Ratcliffe  v.  Sangston    (1862),   18   Md.  383,   389. 
174 


CHAP.    XVI.]  ACTION    BY    MAJORITY.  [§    117. 

is  dependent  on  its  going  into  effect  by  "leave"  of  the  trustees 
themselves.17  It  is  to  be  remembered,  however,  that  the  mere 
fact  that  a  majority  of  the  trustees  may  govern,  where  an 
instrument  so  provides,  does  not  mean,  necessarily,  that  they 
may  act  without  consulting  the  others.  Thus  where  it  was 
provided  by  a  trust  instrument,  that  the  business  of  a  com- 
pany was  to  be  transacted  by  five  trustees  and  a  majority  of 
them  was  to  govern  and  that  "if  any  trustee  should  be  absent 
from  the  commonwealth,  the  others  should  have  all  the  powers 
herein  named,"  it  was  said  by  Shaw,  C.  J. :  "Where  the  power 
is  to  deliberate  and  examine,  and  discretion  and  judgment  are 
required  there,  although  a  majority  may  ultimately  decide,  yet 
all  must  deliberate  and  advise,  or  at  least  have  full  notice  and 
opportunity  to  do  so.  The  company,  whose  trustees  they  are, 
are  entitled  to  the  full  benefit  of  the  knowledge  and  discre- 
tion of  them  all."18  Thus  it  seems  clear,  that  instruments  cre- 
ating trusts  may  provide  for  departure  from  the  rule  or 
principle  of  unity  of  action  by  trustees,  but  provisions  should 
clearly  define  the  limits  of  departure. 

This  rule  of  unity  perhaps  more  correctly  should  be  called 
a  rule  of  co-operation  in  the  exercise  of  the  powers  of  the  of- 
fice of  trustee;  that  is  to  say,  it  is  a  policy  to  secure  the  ap- 
proval of  the  several  trustees  for  the  presumed  advantage  of 
the  trust  and  its  beneficiaries,  and  not  to  enable  an  outsider 
to  claim  the  invalidity  of  an  act  by  a  single  trustee  or  any 
number  less  than  the  whole  in  his  interest  or  defense,  and  he 
may  claim  its  validity  when  the  act  is  in  an  emergency  or  it  is 
ratified.  Thus  it  was  said  by  the  Supreme  Court  of  District 
of  Columbia  that:  "It  is  undoubtedly  true,  as  the  general  law, 
that  when  the  administration  of  a  trust  is  vested  in  several 
trustees,  they  must  all  co-operate  in  the  exercise  of  the  powers 
of  their  office,  and  cannot  act  separately  or  independently  of 
each  other.  This  is  held  by  all  the  authorities  on  the  subject. 
But  this  rule  is  not  without  its  exceptions  and  qualifications. 

ITDuckworth   v.    Ocean    Steamship    Co.    (1896),    98    Ga.    193,    28 
S.  E.  736. 

ISHeard  v.  March  (1853),  66  Mass.  (12  Cush.)  580,  584. 

175 


§   117.]  TRUSTEES  AS   MANAGERS.  [CHAP.   XVI. 

One  trustee  may  in  many  things  act  as  agent  of  all  the  trustees, 
especially  in  cases  of  emergency;  and  there  may  be  ratification 
of  the  act  of  one  trustee  by  his  associates  in  the  trust.  In  this 
case  one  trustee  in  express  terms  purported  to  act  for  the  other 
as  well  as  for  himself.  *  *  *  This  sale,  being  concurred  in  by 
both  trustees,  operated  as  a  ratification  by  both  of  the  previ- 
ously existing  agreements  between  Williams  and  the  appel- 
lant."19 

This  power  of  ratification  by  trustees  is  not  confined  merely 
to  acts  of  one,  or  a  less  number  than  all  of  the  trustees,  but 
extends  also  to  acts  of  an  agent  appointed  by  one  or  more,  but 
less  than  all,  of  the  trustees.20  Summarized,  it  may  be  said, 
that  whatsoever  fairly  comes  within  the  discretionary  power 
vested  in  trustees  may  be  accomplished  according  to  the  usual 
methods  adopted  in  the  conduct  of  business,  with  there  being 
ever  back  of  them  the  power  of  a  court  of  equity  to  require 
that  their  powers  "are  all  to  be  exercised  only  for  the  pur- 
pose of  effectuating  the  trust;  and,  when  it  appears  that  such 
powers  are  perverted  to  the  detriment  of  the  cestui  que  trust, 
the  court  will  promptly  interpose  its  protective  authority."21 
This  discretion  may  resemble  that  of  a  judicial  officer,  that  is 
to  say,  the  doing  of  one  of  two  things,  doing  of  either  of  which 
is  within  the  power  of  trustees  as  conferred  by  the  instrument 
creating  the  trust,  may  be  compelled,  so  far  as  making  him 
choose  one  or  the  other,  but  not  directing  which.22  It  has  been 
said  that  a  court  of  chancery  cannot  "control  the  trustees  in  the 
exercise  of  a  discretionary  power  reposed  in  them  by  the  testator, 
nor  compel  them  to  exercise  such  discretion,"23  but  this  state- 
ment was  made  in  a  case  where  such  control  was  given  to  the  trus- 

l9Ubhoff  v.  Brandenburg  (1905),  26  App.  D.  C.  3.  See  also 
Phila.  Trust  S.  D.  &  I.  Co.  v.  Phila.  &  R.  C.  &  I.  Co.  (1891),  139  Pa. 
534,  21  Atl.  70. 

20H111  v.  Peoples   (1906),  80  Ark.  15,  95  S.  W.  990. 

21  Albright  v.  Albright  (1884),  91  N.  C.  220,  225;  Jones  T. 
Jones  (1888),  124  111.  254,  15  N.  E.  751. 

22Matter  of  Stewart   (1892),  131  N.  Y.  279. 

23Dillard  v.  Dillard's  Ex'rs.  (1895),  Virginia,  21  S.  E.  669. 
176 


CHAP.    XVI.]  TENURE    OF    TRUSTEES.  [§    118. 

tees  as  made  the  estate  in  them  "equivalent  to  a  fee  simple,"  and 
even  in  that  case  the  court  said:  "It  is  perhaps  true,  that,  if  such 
discretion  were  exercised  from  fraudulent  or  improper  mo- 
tives, a  court  of  equity  might  interfere,  but  in  such  cases  it 
must  be  so  alleged  and  sustained  by  the  proofs."  The  three  next 
above  cited  cases,  and  especially  the  last  one,  enforce  the 
theory  of  the  validity  of  special  powers  conferred  by  trust  set- 
tlors and  the  jurisdiction  of  a  court  of  equity  to  enforce  the 
relation  of  trust  that  is  created. 

§  118.  Appointment  and  Tenure  of  Trustees. — It  is  un- 
necessary to  cite  authority  that  an  instrument  sufficient  to  cre- 
ate a  trust  may  appoint  its  trustees,  and,  were  this  desired, 
cases  which  follow  conclusively  so  presume.  These  cases  relate 
directly  to  the  question  of  tenure  and  substitution  of  trustees. 
A  very  stoutly  contested  case,  decided  by  the  Court  of  Appeals 
of  District  of  Columbia  and  affirmed  by  the  United  States  Su- 
preme Court,24  considered  the  grant  of  power  in  a  will  to  one 
of  two  trustees  and  the  beneficiaries,  for  sufficient  cause  and 
by  unanimous  resolution,  to  remove  the  other  trustee  from  of- 
fice, the  trust  being  an  active  one.  The  Court  of  Appeals  said : 
"The  power  to  remove  their  trustee  was  vested  in  the  defend- 
ants to  this  cause.  The  power  to  determine  when  there  was 
good  and  sufficient  cause  for  such  removal  was  necessarily  in 
them  also,  subject  to  the  restraining  power  of  a  court  of  equity 
against  the  abuse  of  it.  They  exercised  their  right  to  deter- 
mine that  good  and  sufficient  cause  existed;  they  found  that 
there  was  such  cause;  and  they  removed  the  trustee  according- 
ly. Upon  the  face  of  their  proceeding,  it  is  beyond  question  that 
they  acted  within  the  scope  of  their  authority."  Then  the  court 
inquires  whether  or  not  their  finding  of  such  cause  was  "a 
pretense  for  the  exercise  of  arbitrary  and  unreasonable  author- 
ity," and  concluding  that  there  was  "dissension,  bitter  and  un- 
compromising," between  the  parties  as  to  "active  trusts  in 
which  the  judgment  and  discretion  of  both  trustees  are  neces- 
sary for  their  proper  execution,"  the  removal  was  not  to  be 
24May  v.  May,  5  App.  Cas.  D.  C.  552;  same  case  (1897),  167  U. 
S.  310. 

177 


§    118.]  REMOVAL   OF   TRUSTEES.  [CHAP.    XVI. 

deemed  an  arbitrary  and  unreasonable  exercise  of  authority, 
the  court  saying  it  would  not  enter  into  any  investigation  of 
the  causes  of  dissension. 

The  United  States  Supreme  Court  speaking  by  Mr.  Justice 
Gray  discusses  the  clause  for  removal  as  follows:  "If  no  such 
power  had  been  given  them  (the  beneficiaries)  by  the  testator, 
any  one  of  them  could  have  applied  to  a  court  of  equity,  and 
have  had  the  trustee  removed,  on  proving  good  and  sufficient 
cause  therefor,  satisfactory  to  the  court.  If  the  words  'for  good 
and  sufficient  cause/  in  the  codicil,  mean  only  such  cause  as 
would  be  deemed  by  a  court  of  equity  to  be  deemed  good  and 
sufficient,  the  only  effect  of  conferring  the  express  power  of 
removal  would  be  to  restrict  the  power  of  removal  by  requir- 
ing their  action  to  be  unamimous.  This  cannot  have  been 
the  testator's  intention.  The  extent  of  the  power  con- 
ferred appears  to  us  to  have  been  well  and  accurately  stated 
by  the  Court  of  Appeals."  These  two  courts,  therefore,  sustain 
the  right  of  a  settlor  to  vest  in  beneficiaries  the  power  of  re- 
moval, but  the  Supreme  Court  said  by  way  of  caution,  that  it 
must  not  be  understood  as  approving  the  selection  of  their  at- 
torney as  trustee,  as  his  participation  in  a  family  controversy 
might  make  him  unfit  to  be  trustee,  because  the  removed  trustee 
was  a  beneficiary  interested  in  the  trust.  It  left  this  question 
to  be  dealt  with  by  the  court  below.  Though  the  codicil  also 
gave  the  beneficiaries  the  power  to  appoint  a  successor,  it  is 
perceived  that  the  court  thought  this  power  should  be  exer- 
cised with  due  regard  to  the  rights  of  all  beneficiaries  and  not 
in  an  arbitrary,  unreasonable  way.  Thus  it  is  perceived  that 
in  a  trust  a  court  of  equity  maintains  its  supervisory  control  over 
its  administration,  to  the  end  of  effectuating  its  purposes  and 
maintaining  in  completest,  integrity  the  rights  of  each  and  every 
of  its  beneficiaries  and  preventing  any  and  all  undue  advant- 
age being  obtained  by  one  over  another.  These  are  the  funda- 
mentals of  a  trust,  of  which  a  court  of  equity  will  not  permit 
any  violation. 

The  power  other  than  by  court  to  appoint  new  trustees  is 
178 


CHAP.    XVI.]  REMOVAL    OF    TRUSTEES.  [§     118. 

said  never  to  exist  except  in  express  trusts  as  created  by  deed 
or  will,  or  as  said  in  Perry  on  Trusts25  and  approved  by  a 
Kentucky  Court:20  "The  power  to  appoint  new  trustees  in 
place  of  the  original  ones  can  only  be  given  by  the  author  and 
creator  of  the  trust;  for,  in  cases  where  courts  are  called  upon 
to  appoint  trustees,  authority  to  appoint  successors  will  not 
be  given,  but  recourse  must  be  had  to  the  courts  toties  quoties." 
Therefore  it  is  seen  how  necessary  it  is  in  such  trusts  as  this 
work  considers,  that  full  and  specific  provisions  should  be  em- 
braced in  instruments  creating  them  for  the  appointment  of 
new  trustees  and  their  succeeding  to  the  powers  of  the  old 
ones. 

The  Circuit  Court  of  Appeals  of  the  Fifth  Circuit,27  rendering 
a  per  •  curiam  decision,  from  which  one  of  the  three  sitting 
judges  dissented,  considered  a  clause  in  a  deed  of  trust  giving 
to  a  majority  of  the  bondholders  the  right  to  remove  a  trustee. 
The  Circuit  Court  had  denied  the  exercise  of  such  right,  be- 
cause it  was  said  this  majority  was  removing  the  trustee,  be- 
cause he  was  proceeding  to  do  that  which  the  minority  had  the 
legal  right  to  demand  should  be  done,  and  the  per  curiam 
opinion  said:  "We  find  nothing  in  the  record  to  show  that  there 
was  any  abuse  of  the  power  so  unequivocally  and  clearly  grant- 
ed. *  *  *  If  the  action  of  the  majority  of  the  bondholders  is 
an  abuse  of  the  trust,  or  in  any  serious  degree  prejudicial  to  the 
interest  of  any  bondholder,  so  that  a  court  of  equity  should 
interfere  against  the  exercise  of  the  absolute  right  conferred 
upon  the  majority  of  bondholders,  let  the  removed  trustee  or 
any  bondholder  in  interest  answer  the  bill  to  show  cause."  This 
opinion  refers  to  May  v.  May,  supra,  as  to  the  right  of  the 
removing  parties  to  determine  when  cause  for  removal  existed, 
and,  therefore,  when  exercised  it  should  operate  immediately, 
unless  a  court  of  equity  arrests  its  operation,  because  there  is 
an  abuse  of  the  power.  Presumptively,  the  exercise  is  lawful 
and  divests  the  removed  trustee  of  all  power. 

25(6th  Edition)   Section  287. 

26Grundy  v.  Drye  (1898),  104  Ky.  825,  839,  48  S.  Wl  155. 
27March  v.  Romare  (1902),  116  Fed.  355,  53  C.  C.  A.  575. 

179 


§    119.]  SUBSTITUTION    OF  TRUSTEES.  [CHAP.    XVI. 

As  suggested  in  May  v.  May  and  Grundy  v.  Drye,  supra, 
these  provisions  both  obviate  the  necessity  of  applying  to  courts 
to  fill  vacancies  and  may  add  other  reasons,  such  as  mere  pref- 
erence for  a  change  of  trustees.  An  Illinois  case  shows  that 
it  may  be  for  the  former  purpose.28  Thus  is  was  said:  "The 
point  that  the  fact  that  the  will  authorizes  the  trustee,  in  the 
event  of  his  sickness,  old  age  or  for  any  other  good  cause  ap- 
pearing to  him,  to  appoint  his  successor,  renders  the  trust  void, 
is  clearly  without  force.  His  action  in  that  regard,  if  arbitrarily 
or  unwisely  exercised,  would  be  controlled  by  the  court  upon 
the  application  of  the  cestui  que  trust,  even  without  this  provi- 
sion. There  can  be  no  doubt  that  the  court  would  have  the 
power  to  appoint  some  suitable  person  to  execute  the  trust,  if 
for  any  reason  Jefferson  Orr  became  incapable  of  doing  so." 

The  claim  of  invalidity  must  have  been  on  the  ground  that 
there  was  merely  a  fugitive  sort  of  title  in  the  trustee,  but  this 
was  repudiated  on  the  theory,  that  the  intent  to  create  a  trust 
was  the  controlling  idea  and  the  designated  trustee  was  ap- 
pointed to  take  the  place  of  a  court  to  see,  that  it  did  not  fail 
for  want  of  a  trustee,  but  this  power,  wholly  in  the  interest  of 
others,  must  be  thus  exercised,  or  a  court  of  equity  will  inter- 
fere. 

Substitution  of  trustees  may  be  authorized  either  directly  or 
upon  a  contingency,  as  for  example  where  a  deed  of  trust 
authorized  a  trustee,  unwilling  or  unable  to  act  in  carrying  out 
the  trust,  to  appoint  a  substitute  trustee,  and  should  he  refuse 
to  appoint,  then  the  lawful  holder  of  the  note  secured  by  the 
deed  of  trust  to  appoint  a  substitute  trustee.29 

§  119.  Occasion  for  Appointment  of  Trustees. — It  has  been 
seen  that  it  is  as  competent  for  the  creator  of  a  trust  to  provide 
for  the  substitution  of  new  trustees  as  it  is  within  his  power 
to  create  the  trust,30  but  all  illustrations  in  decided  cases  of 

28Qrr  v.  Yates  (1904),  209  111.  222,  240,  70  N.  E.  731. 
29Jacobs  v.   McClintock   (1880),  53   Tex.  72. 
SOShaw  v.  Paine  (1866),  12  Allen  (Mass.)  293. 
180 


CHAP.    XVI.]  ELECTION    OF  TRUSTEES.  [§    120. 

the  timeliness  or  occasion  for  the  exercise  of  the  power  of  sub- 
stitution relate  to  contingencies,  and  not  where  terms  of  service 
prescribed  or  mere  lapse  of  time  may  present  occasion  for  the 
appointment  of  new  trustees.  Decisions  where  terms  are  not 
prescribed  naturally  speak  of  the  necessity  of  conditions  prec- 
edent to  the  appointment  of  new  trustees,  such  as  resignation, 
death,  or  conduct  or  circumstances  subsequently  arising. 

§  120.  Fixing  Terms  for  Trustees  and  Election  of  Succes- 
sors.— The  absolute  power  of  the  creator  of  a  trust,  as  is  seen, 
to  prescribe  upon  what  contingencies  beneficiaries  may  remove 
trustees  and  select  their  successors  would  seem  clearly  to  em- 
brace his  right  to  provide,  that  at  stated  intervals  new  trustees 
may  be  chosen.  That  such  a  provision  is  a  reasonable  one  as 
to  a  trust,  interests  in  which  are  represented  by  transferable 
shares,  may  not  be  doubted.  It  seems  not  only  to  make  orderly 
the  exercise  of  the  power  of  removal,  but  to  bring  togethe* 
the  owners  of  interests,  who  may  make  proper  investigation 
of  the  conduct  of  trustees  in  the  execution  of  their  trust,  and 
by  re-electing  or  removing  them,  approve  or  disapprove  what 
they  have  done,  whether  within  or  without  their  discretion.  In 
other  words,  such  a  provision  tends  to  keep  trustees  and  bene- 
ficiaries in  touch  with  each  other,  and  gives  the  latter  oppor- 
tunity for  consultation  with  each  other  as  to  their  common 
interests.  This  kind  of  trust  calls  for  the  exercise  of  a  business 
policy  and,  therefore,  its  beneficiaries  should  have  opportunity 
to  select  trustees,  whose  views  accord  best  with  those  of  the 
majority  of  beneficiaries.  It  is  certain  that  the  term  theory  of 
tenure  and  removal  by  election  of  successors,  just  as  in  cor- 
porations with  respect  to  directors,  has  been  adopted  generally 
in  trusts,  whose  interests  are  represented  by  transferable  shares. 
Take  for  example,  a  great  English  case,31  often  referred  to  and 
abundantly  quoted  from  in  this  work,  where  it  was  provided 
that  cestuis  que  trust  at  an  annual  meeting  duly  called  could 
elect  new  trustees.  The  court  said:  "Of  course  that  should 
be  done  in  some  way  which  will  enable  those  who  are  actually 
present  to  bind  those  who  are  absent,  to  enable  the  majority 
SlSmith  v.  Anderson  (1880),  15  Ch.  D.  247. 

181 


§    120.]  ELECTION   OF   TRUSTEES.  [CHAP.    XVI. 

to  bind  the  minority,  as  otherwise  the  assent  of  the  cestuis  que 
trust  could  never  be  effectually  obtained,  and,  therefore,  a  form 
is  adopted  similar  to  the  provisions  in  articles  of  association 
as  to  meetings  of  shareholders,  but  that  is  only  mattei  of  form. 
They  meet  as  cestuis  que  trust  to  give  their  assent,  not  as  mem- 
bers of  the  partnership  joining  to  carry  on  and  control  the 
business  of  the  partnership." 

In  a  Massachusetts  case,32  in  which  the  trust  relation  was 
squarely  recognized,  it  was  provided  that  any  trustee  could  be 
removed  and  a  successor  appointed  by  three-fourths  in  value  of 
the  shareholders. 

In  an  Illinois  case33  where  there  was  a  valid  trust  in  behalf 
of  shareholders  therein,  it  was  held  that  the  fact,  that  by  the 
trust  agreement  two-thirds  of  the  shareholders  in  interest  could 
remove  any  trustee  and  fill  any  vacancies  however  caused,  in 
no  way  militated  against  its  character  as  a  trust,  as  this  reserva- 
tion of  power  was  not  the  divesting  at  all  of  legal  title  in 
trustees  nor  unduly  restrictive  of  their  control.  It  is  scarcely 
to  be  doubted  that,  were  there  found  set  forth  in  full  in  re- 
ported cases  instruments  creating  trusts  in  which  interests  are 
represented  by  transferable  shares,  like  provisions  to  those  for 
the  election  of  directors  would  appear,  and  they  would  have 
appeared  had  any  point  as  to  the  validity  of  such  a  provision 
been  raised. 

But  there  is  found,  as  indicated  above,  cases  where  share- 
holders may  remove  under  a  power  exactly  similar  to  what  is 
called  in  March  v.  Romare,  supra,  "the  absolute  right  conferred 
on  the  majority  of  the  bondholders"  in  that  case,  and  why  stated 
times  may  not  be  fixed,  as  say  annual  meetings  of  shareholders, 
for  the  exercise  of  such  a  right,  it  is  difficult  to  conceive.  If  they 
may  be  so  fixed,  then  trustees'  terms  may  be  fixed,  with  "the 
absolute  right"  to  be  exercised  or  not  at  the  pleasure  of  share- 

32Hussey  v.  Arnold  (1904),  185  Mass.  202,  70  N.  E.  87. 
33Hart  v.  Seymour   (1893),  147  111.  598,  35   N.  E.  246. 
182 


CHAP.    XVI.]  JOINT  AND   SEVERAL   RESPONSIBILITY.  [§    121 

holders.  In  this  connection  it  is  suggested  that  terms  of  trustees 
should  be  stated  to  continue  until  their  successors  are  duly  ap- 
pointed and  inducted  into  office,  and  then  the  new  trustee  be 
clothed  with  the  power  and  vested  with  the  title  that  was  in  the 
former  trustee,  all  power  in  him  to  cease  and  become  null  and 
void. 

§  121.  Joint  and  Several  Responsibility  of  Trustees — Con- 
fidence reposed. — It  is  to  be  remembered  that  the  creation  of 
a  trust  is  the  reposing  of  confidence  by  its  creator  in  a  trustee, 
or,  if  more  than  one,  in  trustees  severally.  He  alone  has  the 
power  of  appointment  and  no  one  of  several  trustees  has  the 
right  to  object  to  another's  acceptance  of  the  appointment.  He 
may  refuse  to  serve  with  another,  but,  if  he  accepts,  it  would 
not  seem  that  he  should  vouch  for  his  fidelity,  and  whether 
he  has  personal  confidence  or  not  in  such  other's  fidelity  may 
not  be  the  test  of  liability  for  his  defaults.  Thus  it  was  said 
in  an  opinion  by  the  Tennessee  Supreme  Court:  "Two  trustees 
are  appointed  to  execute  a  trust,  the  final  operation  of  which 
is  not  to  be  completed  for  years ;  they  undertake  to  execute 
it,  they  are  intended  as  checks  on  each  other,  have  an  equal 
control  over  the  fund,  are  mutually  bound  to  attend  to  the 
interest  of  the  trust,  and  shall  one  of  them  be  permitted  to  go 
to  sleep  and  trust  everything  to  the  management  of  his  co- 
trustee,  and  when  in  the  course  of  ten  or  fifteen  years,  the 
fund  having  become  wasted,  and  his  co-trustee  insolvent,  he 
is  called  upon  to  make  it  good,  shall  he  be  heard  to  say  he  had 
implicit  confidence  in  his  companion,  and  permitted  him  to 
retain  all  the  money  and  appropriate  it  as  he  pleased,  and  that 
he  ought  not  therefore  to  be  charged?  Surely  not;  it  is 
neither  law  nor  reason."34  It  is  to  be  noticed  that  the  court  does 
not  say,  at  all,  that  the  defendant  was  responsible  for  the  mere 
default  of  his  co-trustee,  but  for  the  blind  confidence  which 
permitted  that  default  to  become  disastrous.  The  court  also 
said :  "If  one  trustee  wrongfully  permit  the  other  to  detain  the 
trust  fund  a  long  time  in  his  own  hands  without  security,  he 
will  be  deemed  liable  for  any  loss,"  an  (admission  that  he 
34Deaderick  v.  Cantrell  (1837),  10  Yerg.  263,  31  Am.  Dec.  57fl. 

183 


§    122.]  LIABILITY    OF    CO-TRUSTEES.  [CHAP.    XVI. 

might  detain  it  a  reasonable  time  without  his   default   in  ap- 
propriating it  being  chargeable  to  his  co-trustee. 

The  conclusion  is  that  each  trustee  is  trusted  by  the  settlor 
as  to  the  proper  exercise  of  his  authority,  whether  that  result 
in  loss  to  the  trust  estate  or  not,  but  beyond  that  each  trustee 
must  be  awake  and  active  in  behalf  of  the  interests  of  the  trust 
estate. 

§  122.  Acts  and  Defaults  of  Co-Trustee. — The  correctness 
of  the  conclusion  just  above  stated  is  illustrated  by  many  cases 
where  it  was  sought  to  hold  trustees  liable  for  the  default^ 
of  co-trustees.  Thus  the  Pennsylvania  Supreme  Court  held  a 
trustee  liable  for  the  default  of  his  co-trustee,  because  it  was 
held  that  he  had  "reason  to  believe  that  his  co-trustee  was  not 
acting  in  good  faith  or  might  convert  the  trust  funds  to  his 
own  use"  and  "it  was  incumbent  upon  him  to  take  necessary 
steps  to  prevent  such  misapplication  of  the  funds."35  The  op- 
posite conclusion  was  reached  by  the  New  York  Court  of 
Appeals  where  the  facts  showed  a  conversion  by  a  co-trustee, 
notwithstanding  that  the  fund  converted  was  turned  over  by 
two  of  three  trustees  to  the  one  converting  it.36  Judge,  after- 
wards Justice  U.  S.  Supreme  Court,  Peckham  said :  "We  have 
read  many  authorities  on  this  branch  of  the  law.  They  are 
numerous  and  the  courts  have  said  that,  if  the  trustee  un- 
necessarily do  an  act  by  which  the  funds  are  transferred  from 
the  joint  possession  of  all  to  the  sole  possession  of  one,  the 
trustee  who  does  this  unnecessary  act  must  be  held  liable  for 
the  due  application  of  the  fund  by  his  co-trustee.  The  ques- 
tion is  what  is  meant  by  the  word  'unnecessarily,'  and  it  would 
seem  to  be  that  an  act  is  unnecessary  when  done  outside  the 
usual  course  of  business  pertaining  to  the  subject.  In  Bruen 
v.  Gillet  (115  N.  Y.  10)  the  funds  were  turned  over  to  one 
of  the  assignees  without  the  slightest  necessity  and  they  con- 
tinued in  the  possession  of  the  assignee  with  the  knowledge  of 

SSAdams'  Estate   (1908),  221  Pa.  77,  70  Atl.  436,  15  Am.  &  Eng. 
Anno.   Cas.  518. 

36Furdy  v.   Lynch    (1895),   145    N.   Y.   462,  40   N.   E.  232.  . 
184 


CHAP.    XVI.]  LIABILITY    OF    CO-TRUSTEES.  [§    122. 

his  colleague  that  they  were  being  used  in  his  private  business. 
In  Gasquoine  v.  Gasquoine  (1894),  1  Ch.  470,  an  act  which 
was  done  in  the  regular  course  of  business  in  administering 
the  property  was  held  not  to  be  unnecessary,  and  the  trustee 
was  held  not  liable  for  a  resulting  loss  by  the  dishonesty  of 
his  co-trustee.  Numerous  authorities  are  cited  in  these  two 
cases  upon  this  subject."  In  the  case  at  bar  a  very  large  sum 
came  into  the  hands  of  three  trustees  which  was  to  be  paid  out  to 
depositors  in  a  savings  institution.  The  business  of  making  these 
payments  was  left  to  one  of  them,  checks  being  made  in  his  favor 
from  time  to  time.  All  of  the  trustees  were  men  of  high 
character.  Out  of  over  $260,000  the  single  trustee  defaulted  as  to 
$33,000.  The  court  said :  "It  was  a  usual,  proper  and  ordinary 
way  to  make  payments  to  these  700  odd  creditors,  under  the 
circumstances  above  detailed,  through  the  hands  of  one  who 
was  acting  in  the  double  capacity  of  trustee  and  receiver,  and 
who  in  his  latter  character  had  all  the  data  requisite  to  make 
the  payments  and  to  obtain  accurate  information  as  to  the 
amount  of  the  indebtedness  in  each  case.  And  we  do  not  think 
it  was  necessary  for  each  trustee  to  attend  and  sign  each  check 
and  make  such  payments  instead  of  placing  sums  from  time  to 
time  in  the  hands  of  the  trustee-receiver  and  permitting  him  to 
make  the  payments." 

The  great  weight  of  authority  lies  within  the  boundaries  of 
these  two  cases,  i.  e.,  Adams'  Estate  and  Lynch  v.  Purdy  supra, 
the  gist  of  liability  being  negligence  vel  non  contributing  to 
loss  from  a  co-trustee's  default.  Thus  it  has  been  said:  "The 
principle  of  the  cases  is,  that,  if  the  estate  be  once  properly 
invested,  the  securities  may  be  lodged  in  the  hands  of  one  trus- 
tee and  he  be  permitted  to  collect  the  interest  and  pay  it  over 
to  the  tenant  for  life,  and  the  other  trustee  will  not  be  liable 
for  default  in  paying  over  the  interest,  until  he  has  notice  of 
some  default  or  misconduct  on  the  part  of  his  co-trustee.  This 
rule  is  based  upon  the  circumstance,  that  it  is  practically  impos- 
sible for  both  trustees  to  attend  in  person  to  the  collection  of 
the  rents  or  interest."37  This  is  but  to  say  that  confidence  in  the 

37Dyer  v.  Riley  (1893),  51  N.  J.  Eq.  124,  26  Atl.  327. 

185 


§    122.]  LIABILITY    OF    CO-TROSTEES.  [CHAP.    XVI. 

integrity  of  each  of  several  trustees  is  just  as  firmly  reposed 
by  a  settlor  as  where  there  is  a  single  trustee,  and  it  is  not 
negligence  for  each  trustee  to  show  the  same  confidence  until 
his  suspicions  are,  or  should  have  been,  aroused.  This  prin- 
ciple is  well  applied  by  the  U.  S.  Supreme  Court38  in  an  opinion 
affirming  and  strongly  commending  the  opinion  by  the  Su- 
preme Court  of  District  of  Columbia  in  the  same  case.-"9  The 
co-trustee,  a  man  of  excellent  reputation  for  business  integrity, 
was  found,  upon  his  death,  to  have  squandered  many  estates 
in  his  custody.  The  surviving  trustee  recovered  a  small  divi- 
dend by  suit,  and  then  he  was  sued  by  the  ccstui  quc  trust  for 
the  remainder.  The  opinion,  after  saying  that  it  was  not  con- 
tended as  a  matter  of  law  that  there  was  any  liability  for  the 
mere  malfeasance  of  a  co-trustee,  said :  "What  is  contended  is 
that  an  abandonment  of  discretionary  power  by  a  trustee  to  a 
co-trustee,  where  the  trust  is  entitled  to  the  united  discretion 
of  both,  is  such  an  act  of  supine  negligence  as  to  render  the  trus- 
tee who  has  abandoned  his  active  participation  in  the  manage- 
ment of  the  trust  liable  for  the  losses  occasioned  by  the  miscon- 
duct of  the  co-trustee."  This  principle,  though  sound,  was  held 
not  applicable  to  the  facts  of  the  case,  and  the  court  then  adopts 
the  following  language  used  by  the  Supreme  Court  of  the 
District:  "After  a  loss  has  occurred,  as  in  this  case,  by  the  posi- 
tive fault  of  some  one,  it  may  be  easy  to  say  how  it  could  have 
been  prevented ;  but  in  order  to  hold  someone  also  fairly  respons- 
ible, the  point  of  view  held  by  the  party  sought  to  be  made  liable 
at  and  before  the  loss  occurred  is  the  only  safe  point  to  assume. 
******  From  the  light  of  the  circumstances  shown,  I  can- 
not convince  myself  that  George  F.  J.  Colburn  was  guilty  of 
any  such  negligence  as  to  render  him  liable." 

The  following  language  in  the  opinion  of  the  lower  court, 
strongly  approved  as  above  stated,  appears:  "A  co-trustee  can- 
not be  held  responsible  for  loss  or  injury  to  the  estate  occurring 
through  the  fault  of  a  co-trustee,  if  he  himself  has  been  blame- 
less." 

38Colburn  v.  Grant  (1900),  181  U.  S.  601,  45  L.  Ed.  1021. 
39Colburn  v.  Grant  (1900),  16  App.  Cas.  D.  C.  107. 
186 


CHAP.    XVI.]  ADVICE   OF   COURTS.  [§    123. 

§  123.  Trustee  Seeking  Direction  of  Courts. — One  of  the 
advantages,  that  may  be  deemed  to  exist  in  respect  to  trust 
estates  embarked  in  trade,  is  the  general  right  of  the  trustee  t6 
apply  to  a  court  of  equity  for  direction  in  the  execution  of  his 
trust.  This  doctrine  has  been  thus  expressed :  "There  is  no  ques- 
tion that  in  cases  of  express  trusts  the  trustee,  if  in  doubt,  may, 
for  his  protection,  apply  to  a  court  of  equity  for  a  construction 
of  the  instrument  creating  the  trusts,  and  for  their  execution 
under  the  court's  direction  and  supervision.  Cases  of  that  class 
form  an  exception  to  the  general  rule  that  courts  of  equity  will 
not  declare  future  rights  but  will  leave  them  to  be  determined 
when  they  come  into  possession."40  This  jurisdiction  has  often 
been  sustained  as  to  wills,  but  solely  because  they  create  trusts,41 
in  which  cases  courts  of  equity  will  construe  wills,  and  "give 
directions  to  the  conduct  of  such  trustees  in  the  administration 
of  the  trust"  under  the  will.  It  is  suggested  that  a  will  con- 
taining a  testamentary  trust  would  possess  an  advantage  over 
another  not  creating  such  a  trust,  in  the  event  of  there  being 
ambiguous  provisions.  This  is  well  exemplified  in  a  Massa- 
chusetts case,42  which  ascertained  merely  the  rights  of  devi- 
sees in  a  will  creating  a  trust. 

As  showing  how  important  this  advantage  is  are  the  remarks 
of  Sharswood,  J.,43  in  a  case  where  it  was  held  that  the  Penn- 
sylvania Orphans  Court  had  no  such  advisory  power:  "It 
would,  perhaps,  be  a  very  convenient  practice  immediately  up- 
on the  death  of  a  decedent  to  have  all  possible  questions  which 
might  arise  upon  the  construction  of  his  will  and  in  the  settle- 
ment of  his  estate,  settled  by  a  decree  of  the  orphans'  court 
in  limine,  and  by  way  of  anticipation  and,  by  an  appeal  to  the 
Supreme  Court  from  such  a  decree,  have  a  final  and  con- 

40Diggs  v.  Fidelity  &  Deposit  Co.  (1910),  112  Md.  50,  75  Atl.  517. 

4lHoagland   v.    Cooper    (1903),    65    N.    J.    Eq.   407,    56   Atl.   705; 
Mersman  v.  Mersman,  136  Mo.  244,  37  S.  W.  909. 

42Chase  v.  Ladd,  155  Mass.  417,  29  N.  E.  637. 

43\Villard's    Appeal,   65    Pa.    265;    approved    in    Morton's    Estate 
(1902),  201   Pa.  269,  272,  50  Atl.  933. 

187 


§   124.]  TRUSTEES  AS   MANAGERS.  [CHAP.   XVI. 

elusive  determination  of  the  subject.     It  would  certainly  save 
counsel  a  great  deal  of  responsibility  in  giving  advice." 

As  showing  that  courts  of  equity  have  no  inherent  power  to 
construe  a  will  but  that  this  is  merely  an  incident  to  its  jurisdic- 
tion over  trusts  abundance  of  authority  may  be  cited.44  There- 
fore all  of  these  cases  are  authority  for  jurisdiction  in  the 
direction  of  trustees  in  the  execution  of  their  powers. 

§  124.  Special  Importance  of  Advisory  Poiver  as  to  Trading 
Trusts. — The  importance  of  such  a  power,  the  exercise  of  which 
is  to  be  upon  application  of  the  trustee  takes  on  a  new  phase 
in  the  case  of  a  trust  estate  embarked  in  trade.  We  know  that 
corporations,  when  the  exigencies  of  affairs  demand  that  there 
shall  be  created  a  bonded  indebtedness,  first  consult  eminent 
counsel  as  to  its  legality,  and  the  matter  is  of  such  vital  impor- 
tance that,  if  there  is  the  least  question  in  this  regard,  the  bonds 
may  either  not  be  marketed  or  at  a  great  disadvantage.  If, 
however,  a  trust  estate  in  business  desires,  under  or  without 
special  provisions  in  a  trust  instrument,  to  do  the  same  thing, 
all  doubts  upon  the  question  judicially  may  be  determined  in 
advance  and  the  court  could  provide  for  the  security  of  in- 
vestors in  such  bonds.  Were  a  court  to  refuse  to  entertain  an 
application  for  direction  in  such  a  matter  this  itself  would  be 
approaching  adjudication,  that  the  authority  was  so  clear  and 
free  from  doubt  that  the  trustee  needed  no  directions  in  the 
premises.45 

The  illustration  of  a  bond  issue  is  one  that  probably  would 
first  come  to  the  mind  of  anyone,  but  it  is  conceivable,  that  in 
the  case  of  a  trust  estate  in  business  it  often  might  be  desirable 
for  other  proposed  steps  by  trustees  judicially  to  be  approved 
by  a  court  of  equity  before  they  are  taken. 

44Monarque  v.  Monarque,  80  N.  Y.  321;  Harrison  v.  Owsley,  172 
111.  629,  50  N.  E.  227;  Clark  v.  Carter,  200  Mo.  515,  98  S.  W.  594; 
Hart  v.  Darter,  107  Va.  310,  58  S.  E.  590,  15  L.  R.  A.  (N.  S.)  599. 

45O'Cain  v.   O'Cain,   51    S.   C.   348,  29   S.   E.   68. 
188 


CHAP.  XVI.]  ADVICE  OF  COURTS.  [§   125. 

§  125.  Question  Must  be  Substantial  and  Involve  Actual 
Doubt. — It  is  to  be  said,  that,  while  trustees  have  the  right  for 
their  protection  to  invoke  the  direction  of  the  court  as  to  a 
proposed  step  or  as  to  the  alternative  of  one  of  two  courses 
necessary  to  be  taken,  yet  the  court  is  not  to  be  resorted  to 
upon  some  fanciful  or  speculative  doubt,  or  where  it  is  doubt- 
ful whether  proposed  action  may  be  for  the  benefit  of  the 
trust  estate.  This  equity  jurisdiction,  so  far  as  direction  in 
execution  is  concerned,  may  not  be  thought  to  be  of  value,  so 
far  as  the  alternative  spoken  of  is  concerned,  but  its  particular 
importance  is  in  regard  to  administration  of  the  trust  estate 
as  a  going  concern  in  business,  though  the  right  to  have  a  court 
construe  a  trust  instrument  in  case  of  doubt  is  not  an  unimpor- 
tant right. 

The  rule  deduced  generally  is  that  a  court  of  equity  will  not 
entertain  a  bill  for  direction,  unless  there  is  a  pressing  necessity 
therefor.  Thus  an  instruction  was  requested  as  to  the  duty 
of  the  trustees  to  give  a  bond  payable!  to  the  Probate  Court  as 
required  by  statute  and  perform  such  duties  and  render  such 
accounts  as  is  required  of  trustees  required  to  give  such  bonds. 
The  court  thought :  "That  the  instruction  thus  requested  is  not 
as  to  the  duty  of  trustees  who  in  the  administration  of  a  trust 
estate  find  themselves  embarrassed  by  difficulties.  The  principal 
requisites  for  a  bill  for  instructions  have  often  been  said  to  be  the 
possession  of  a  fiduciary  fund,  of  which  some  direction  is  neces- 
sarily to  be  made  presently;  conflicting  claims  or  the  probability 
thereof;  and  the  existence  of  no  other  means  of  determining 
rights  or  demands,  so  as  to  protect  a  trustee  from  the  risks  of 
future  liability  or  controversy."46  In  this  case  it  was  thought 
the  probate  court  could  determine  the  question  involved.  It  is 
to  be  noted  that  the  court  does  not  say  that  other  embarrassment, 
than  such  is  as  is  spoken  of,  may  not  receive  the  attention  of 
a  court  of  equity,  but  it  is  to  be  gathered,  that  there  must  be 
embarrassment  of  a  substantial  sort. 

46Bullard  v.  Attorney  General   (1891),   153   Mass.   249,  26  N.   E. 
691. 

189 


§  126.]  ADVICE  OF  COURTS.  [CHAP.  XVI. 

In  New  Jersey  the  right  of  trustees  to  ask  instruction  of  the 
court  is  whether  they  "are  at  the  present  time  confronted  with 
the  duty  of  pursuing  a  course  of  conduct  about  which  they  are 
in  doubt,  and  concerning  which  they  require  instructions  from 
the  court."47  That  instruction  may  be  given  in  other  cases  than 
regards  the  disposition  of  a  fiduciary  fund  is  well  shown  in 
a  prior  New  Jersey  case.48  There  the  court  said:  "If  trustees 
disclose  a  situation  of  their  trust  in  which  a  slavish  adherence 
to  the  terms  of  the  trust  will  operate  to  wholly  prevent  the 
benefits  intended  by  its  creator  and  they  seek  instructions  and 
directions  as  to  their  duty,  I  think  that  instructions  and  direc- 
tions for  a  course  of  conduct,  which  though  differing  from  that 
prescribed  by  the  terms  of  the  trust,  will  actually  carry  out 
the  intent  of  the  creator,  may  well  be  grounded  upon  and  sus- 
tained by  the  necessity  of  the  case.  The  benefits  intended  for 
the  beneficiaries  are  main  subjects  of  consideration.  The  modes 
in  which  those  benefits  may  be  attained  are  incidental  and 
necessity  may  require  a  change  of  mode  to  produce  the  intended 
effect."  This  case  shows,  that,  even  though  the  usual  reason  for 
applying  is  the  trustee's  protection,  yet  the  advantage  of  the 
beneficiaries  also  gives  ground  therefor.  Were  the  rule  other- 
wise it  would  be  something  akin  to  misfortune;  a  court,  sup- 
posed to  be  alert  to  protect  cestuis  que  trust,  should  be  equally 
as  open  for  their  protection  as  it  is  for  that  of  the  trustee. 

§  126.  Effect  on  Trust  Estate  of  Making  Application  for 
Direction. — There  is  authority  that  the  making  of  such  an 
application  does  not  have  the  effect  of  thereafter  placing  the 
trustee  in  the  position  of  a  trustee  of  the  court's  appointment 
with  powers  limited  in  its  decree,49  and  certainly  this  would 
not  be  the  case  where  direction  is  merely  asked  as  to  an 
incidental  thing  under  the  general  powers  vested  in  the  trustee. 

47Hewitt  v.  Green   (1910),  77  N.  J.  Eq.  345,  77  Atl.  25. 

48pennington  v.   Metropolitan  Museum  of  Art   (1903),  65   N.  J. 
Eq.  11,  55  Atl.  468. 

49Qreen  v.  Putney  (1848),  1  Md.  Ch.  262;  Cromey  v.  Bull  (1883), 
4  Ky.  L.  Rep.  787. 
190 


CHAP.  XVI.]  MIGRATION  OF  CORPORATIONS.  [§   127. 

What  might  be  the  rule  where  this  instruction  practically  covers 
the  whole  trust  scheme  it  is  unnecessary  to  inquire.  The  court 
would  scarcely  impose  such  a  condition  on  its  assistance  being 
given,  for  it  does  not  penalize  the  asking  of  assistance  nor  is 
a  court  of  equity  merely  ambitious  to  enlarge  its  jurisdiction. 

This  subject  might  be  pursued  at  greater  length  but  there 
seems  little  need  therefor.  The  purpose  here  is  merely  to 
show  that  a  trust  is  so  protected  by  the  chancellor,  that  there 
is  "an  exception  to  the  general  rule  that  courts  of  equity  will 
not  declare  future  rights,"50  but  they  will  declare  them  and 
that  declaration  will  be  the  law  of  the  case  in  which  a  direction 
is  given  notwithstanding  it  may  be  erroneous,51  because  action 
thereunder  is  to  be  "regarded  as  accepted  by  the  parties  in 
interest."  For  this  estoppel  to  have  the  necessary  force  stipula- 
tions in  the  constating  instrument  may  provide,  either  that 
direction  may  be  asked  without  notice  to  cestuis  que  trust  or 
that  it  be  called  to  the  attention  of  a  regular  or  stated  meeting 
of  the  shareholders. 

§  127.  Limitation  of  Corporate  Capacity  to  its  Domicile. — 
Corporations  are  largely  limited  in  their  right  to  act  to  the 
jurisdiction  wherein  they  are  organized.  An  extreme  expres- 
sion of  this  .view  is  found  in  an  oft-quoted  dictum  of  Chief 
Justice  Taney,  which  reads  as  follows: — 52  "It  is  very  true, 
that  a  corporation  can  have  no  legal  existence  outside  of  the 
boundaries  of  the  sovereignty  by  which  it  is  created.  It  exists 
only  in  contemplation  of  law,  and  by  force  of  the  law;  and 
where  that  law  ceases  to  operate,  and  has  no  longer  obligation, 
a  corporation  can  have  no  existence.  It  must  dwell  in  the 
place  of  its  creation  and  cannot  migrate  to  another  sovereignty." 

Migration,  however,  is  effected  by  corporations  in  a  limited 

degree  and  in  accordance  with  limited  legal  authority.  Directors 

may   generally  hold   their   meetings   outside   of  the   state,   this 

being  justified  in  law  on  the  grounds  that  the  directors  are 

SODiggs  v.  Fidelity  &  Deposit  Co.,  supra. 

SIThorn  v.  DeBreteuil   (1904),  179  N.  Y.  64,  83,  71  N.  E.  470. 
52Bank  of  Augusta  v.  Earle  (1839),  38  U.  S.  (13  Peters)  519,  588. 

191 


§  127.]  FOREIGN  CORPORATIONS.  [CHAP.  XVI. 

mere  agents  of  the  corporation,  and  that  no  attempt  is  here 
made  to  effect  any  action  on  the  part  of  the  corporation  in  its 
artificial  capacity.  It  is  a  general  rule  that  stockholders'  meet- 
ings must  take  place  in  the  State  wherein  the  corporation  is 
created.53 

The  rights  of  parties,  particularly  those  of  stockholders,  are 
often  injuriously  affected  by  the  fact  that  the  internal  affairs 
of  a  corporation  are  only  subject  to  the  laws  wherein  the  cor- 
poration is  created.  Thus  a  suit  may  often  have  to  be  brought 
in  some  different  State,  although  all  the  individuals  concerned 
are  in  the  home  of  the  complainant.  This  hardship  would  not 
apply  to  trust  estates  where  the  management  is  carried  on  else- 
where than  the  place  wherein  the  trust  has  been  created.  The 
jurisdiction  of  equity  which  applies  in  personam  qualifies  it  to 
give  relief  where  service  is  had  upon  the  individual 
trustee  against  whom  complaint  is  made.  This  subject  has  been 
treated  in  a  prior  chapter  on  "Actions  by  and  against  Trustees." 

Corporations  in  doing  business  in  other  States  and  countries 
rest  purely  upon  comity  and  not  upon  right.  In  the  leading 
case  of  Paul  v.  Virginia,54  it  was  held  that  foreign  corporations 
may  be  excludec1  at  the  will  of  the  State,  or  admitted  under 
whatsoever  conditions  the  State  may  impose.  There  are,  however, 
some  exceptions  to  this  rule,  which  are  noted  in  the  case  of 
Pembina  Consolidated  Silver  Mining  &  Milling  Company  v. 
Pennsylvania  :55  "The  only  limitation  upon  this  power  of 
the  State  to  exclude  a  foreign  corporation  within  its  limits,  or 
having  offices  for  that  purpose,  or  to  exact  conditions  for  allow- 
ing the  corporation  to  do  business  or  have  an  office  there,  arises 
where  the  corporation  is  in  the  employ  of  the  federal  govern- 
ment, or  where  its  business  is  strictly  commerce,  interstate  or 
foreign.  The  control  of  such  commerce,  being  in  the  federal 
government,  is  not  to  be  restricted  by  State  authority." 

The  result  of  the  authority  of  the  several  states  and  countries 

53Cook  on  Corporations    (6th    Edition),  §   589. 
54(1868),  8  Wall.   168. 
55(1888),   125   U.   S.   181,   190. 

192 


CHAP.  XVI.]   TRUSTEES  DOING  BUSINESS  IN  FOREIGN  STATES.   [§  128. 

to  impose  upon  foreign  corporations  conditions  precedent 
to  their  right  to  do  business  therein,  is  the  multiplying  of  min- 
ute regulations  in  statutory  law.  This  increase  has  been  ac- 
centuated by  some  states  and  countries  granting  more  liberal 
charters  than  are  by  the  policy  of  other  states  and  countries 
allowed,  and  this  .merely  for  purposes  of  local  fees  in  the 
granting  of  charters,  or,  at  least,  there  is  a  well-settled  suspi- 
cion to  this  effect.  Such  restrictive  legislation,  however,  must 
be  equal  in  its  application  and  affect  corporations  from  other 
states  less  liberal,  and  thus  the  penalty  intended  for  the  few 
must  be  borne  by  the  many.  Some  of  these  restrictions  have 
reached  the  point  where  it  is  almost  impossible  for  many  de- 
sirable businesses  to  meet  the  conditions  local  statutes  impose. 
To  overcome  this  difficulty,  foreign  corporations  frequently 
smuggle  their  business  into  states  by  means  of  domestic  cor- 
porations organized  by  "dummy"  incorporators  and  officered 
by  "dummy"  directors. 

The  usual  conditions  imposed  upon  a  foreign  corporation  are 
that  it  file  a  certified  copy  of  its  charter  in  the  foreign 
state,  subject  itself  to  a  license  tax,  and  appoint  an  agent  for 
the  service  of  process.  Questions  of  service  on  foreign  cor- 
porations crowd  our  courts  with  perplexing  questions.  Num- 
erous decisions  upon  statutory  phraseology  result,  and  cease  to 
be  of  importance  when  statutes  change.  Regulations  upon 
foreign  corporations,  in  other  aspects,  have  given  rise  to  many 
intricate  legal  problems,  with  which  our  courts  are  constantly 
struggling. 

§  128.  Trust  Estate  Distinguished  from  Corporation. — It  is 
thought  that  the  restrictions  placed  upon  foreign  corporations 
cannot  be  applied  to  trust  estates  engaged  in  business.  The 
former  are  created  by  statute;  the  latter,  by  contract.  The 
power  of  the  corporation  is  measured  by  the  law  of  its  domicile, 
or  the  law  where  it  acts  if  away  from  there.  The  trustee,  and 
not  the  trust  estate,  acts  as  an  individual  and  binds  the  trust 
estate,  or  not,  everywhere.  Therefore,  in  case  a  trust  estate  is. 
organized  elsewhere  than  where  its  business  is  to  be  conducted, 

193 


§  129.]  TRUSTEES  DOING  BUSINESS  IN  FOREIGN  STATES.   [CHAP.  XVI. 

the  trustee  is  merely  an  individual,  with  defined  powers  as  to 
binding  the  estate,  exercising  the  rights  of  an  individual  the 
same  as  any  other  individual  in  like  circumstances.  If  there 
may  be  any  choice  of  place  for  organization  different  from  the 
place  of  business,  it  probably  would  be,  either  because  of  the 
law  of  that  state  as  to  the  trust  relation  between  trustee  and 
cestuis  que  trust  as  there  construed  or  because  the  power  of  the 
trustee  as  to  binding  the  trust  estate  in  such  an  instrument  has 
received  construction.  But  this  could  in  no  way  affect  the 
right  of  the  trustee  personally  to  act  or  contract  and  thereby 
be  personally  bound. 

§  129.  Constitutional  Protection. — Trust  Estates  May  Do 
Business  in  Foreign  States  and  Countries  on  a  Basis  of  Com- 
mon Right. — This  question  has  been  aptly  considered  for  the 
purposes  of  this  treatise  in  three  cases  involving  the  validity  of 
legislation  passed  in  Indiana  in  1879,  and  which  provided  as 
follows : 

"It  shall  be  unlawful  for  any  person,  association,  or  corpor- 
ation to  nominate  or  appoint  any  person  as  trustee  in  any  deed, 
mortgage,  or  other  instrument  in  writing  (except  wills)  for 
any  purpose  whatever,  who  shall  not  be,  at  the  time,  a  bona  fide 
resident  of  the  State  of  Indiana;  and  it  shall  be  unlawful  for 
any  person  who  is  not  a  bona  fide  resident  of  the  state,  to  act 
as  such  trustee.  And  if  any  person,  after  his  appointment  as 
such  trustee,  shall  remove  from  the  state,  then  his  rights,  powers 
and  duties  as  such  trustee  shall  cease,  and  the  proper  court 
shall  appoint  his  successor,  pursuant  to  the  provisions  of  the 
act  to  which  this  is  supplemental."  (2988  R.  S.  of  Indiana. 
1881.) 

In  Farmers  Land  &  T.  Co.  v.  Chicago,  etc.56  R.  W.  Co.,  it 
was  said  of  this  statute: 

"It  is  a  statute  which  denies  to  residents  of  other  states  the 
right  to  take  and  hold  in  trust,  otherwise  than  by  last  will  and 
testament,  real  and  personal  property  in  Indiana.     The  right 
56(1886),  27  Fed.  146. 
194 


CHAP.  XVI.]  CONSTITUTIONAL  PROTECTION.  [§  129. 

is  asserted  to  deny  to  persons,  associations,  or  corporations 
within  or  without  the  state,  power  to  convey  to  any  person  in 
trust,  not  resident  of  Indiana,  real  or  personal  property  within 
the  state.  This  is  a  plain  discrimination  against  the  residents 
of  other  states.  If  Indiana  may  disqualify  a  resident  of  another 
state  from  acting  as  trustee  in  a  trust  deed  or  mortgage  which 
conveys  real  or  personal  property  as  security  for  a  debt  due 
to  himself  alone,  or  for  debts  due  himself  and  other  creditors, 
it  would  seem  that  the  state  might  prohibit  citizens  of  other 
states  from  holding  property  within  the  state,  and  to  that  ex- 
tent from  doing  business  within  the  state.  No  state  can  do  the 
latter.  A  person  may,  and  frequently  does,  acquire  a  property 
interest  by  a  conveyance  to  him  in  trust.  A  citizen  of  the  United 
States  can  not  be  denied  the  right  to  take  and  hold  absolutely 
real  or  personal  property  in  any  state  of  the  Union,  nor  can  he 
be  denied  the  right  to  accept  the  conveyance  of  such  property 
in  trust  for  his  sole  benefit,  or  for  the  benefit  of  himself  and 
others.  This  right  is  incident  to  national  citizenship.  Section 
2,  of  Article  4,  of  the  Constitution  of  the  United  States  de- 
clares that  the  'citizens  of  each  state  shall  be  entitled  to  all 
the  privileges  and  immunities  of  citizens  in  the  several  states'. 
'Attempt  will  not  be  made',  say  the  Supreme  Court  of  the  United 
States,  in  Ward  v.  Maryland,  12  Wall,  418,  'to  define  the 
words  "privileges  and  immunities",  or  to  specify  the  rights 
which  they  are  intended  to  secure  and  protect,  beyond  what 
may  be  necessary  to  the  decision  of  the  case  before  the  court. 
Beyond  doubt,  those  words  are  words  of  very  comprehensive 
meaning;  but  it  is  sufficient  to  say  that  the  clause  plainly  and 
unmistakably  secures  and  protects  the  right  of  a  citizen  of  one 
state  to  pass  into  any  other  state  of  the  Union  for  the  purpose 
of  engaging  in  lawful  commerce,  trade  or  business,  without 
molestation;  to  acquire  personal  property;  to  take  and  hold 
real  estate.' " 

The  above  was  quoted  with  approval  by  the  Supreme  Court 
of  Indiana,  and  the  statute  referred  to  was  declared  by  it  to  be 

195 


§    130.]  DIVIDENDS.  [CHAP.   XVI. 

unconstitutional.57     A  federal  court  in  one  of  the  districts  of 
the  state  came  to  the  same  conclusion.58 

§  130.  Distribution  of  Earnings  of  a  Trust  Estate  in  Busi- 
ness.— Possibly  there  is  no  feature  in  the  framing  of  a  trust 
instrument  for  the  creation  of  a  trust  estate  as  a  business 
company  more  demanding  careful  attention  than  what  it  pro- 
vides as  to  distribution  of  its  profits.  The  estate  embarks  in 
trade  just  as  does  a  corporation  or  a  partnership  and  this  may 
prove  to  be  a  successful  venture  or  the  estate  may  be  wrecked 
on  the  shoals  of  disaster.  It  is  an  easy  matter  to  provide  for 
the  distribution  of  such  income  as  rents  or  interest,  but  a 
different  thing  to  provide  for  distribution  of  profits  and  still 
have  due  regard  to  a  business  being  conserved,  so  that  profits 
may  continue  to  be  earned.  And  even  the  character  of  the 
business  to  be  done  presents  each  its  own  problem.  Thus  the 
development  and  projected  exhaustion  of  a  mine  is  different 
from  the  building  of,  extension  and  preservation  of  a  mercantile 
or  manufacturing  business.  The  general  policy  of  the  former 
is  directly  opposed  to  that  of  the  latter. 

In  corporations  the  'declaration  of  dividends  is  regulated  by 
statutes  only  in  the  way  of  forbidding  their  payment  out  of 
capital,  and  it  has  never  been  held,  that  directors  should,  con- 
trary to  their  judgment  as  to  what  is  the  best  interests  of  the 
corporation,  distribute  at  any  time  the  then  total  earnings  of  a 
corporation.  In  the  first  place  it's  hard  to  say  what  are  the 
total  earnings  because  there  is  wear  and  tear  that  should  be 
repaired  and  only  estimates  may  be  made  of  disbursements 
necessary  to  restore  property  to  and  keep  it  in  fit  condition. 
In  the  second  place  surplus  cash  may  be  required  to  avoid 
having  to  pay  interest  on  loans  reasonably  necessary  for  the 
successful  prosecution  of  any  business. 

But  as  to  all  this  it  is  contended,  that  the  position  of  a  trust 
estate  in  business  has  every  advantage,  that  may  be  claimed  for 
a  partnership,  without  the  individual  liability  of  partners,  and 
STRoby  v.  Smith  (1891),  131  Ind.  342,  30  N.  E.  1093. 
SSShirk  v.  LaFayette  (1892),  52  Fed.  855. 
196 


CHAP.    XVI.]  DIVIDENDS.  [§    130. 

a  greatly  superior  position  to  that  of  a  corporation.  It  is  thought 
that  a  careful  perusal  of  a  recent  decision59  by  the  Massa- 
chusetts Supreme  Judicial  Court  in  connection  with  a  copy  of 
the  articles  of  association  of  Massachusetts  Electric  Com- 
panies,60 the  trust  referred  to  in  that  decision,  will  demonstrate 
both  of  these  propositions. 

That  decision  speaks  of  the  common  and  preferred  shares 
authorized  by  the  trust  and  the  full  and  exclusive  control  and 
management  of  its  property,  except  "trustees  could  not  sell, 
mortgage,  pledge  or  incumber  or  dispose  of  any  shares  of  stock 
or  other  property  unless  the  consent  of  the  holders  of  at  least 
two-thirds  of  each  class  of  shares  had  been  given  at  a  meeting 
called  for  the  purpose."  There  was  a  provision  that  to  acquire 
additional  property  the  trustees  could  with  approval  of  two- 
thirds  of  shareholders  issue  new  shares.  But  the  interest  on 
the  preferred  shares  fell  into  arrears  and  no  dividend  had  been 
paid  on  common  shares.  The  trustees  reported  that  it  was  in- 
advisable to  create  a  floating  debt,  and  asked  for  authority  to 
issue  additional  preferred  shares  to  be  offered  at  par  in  payment 
t>f  arrears  of  interest  to  the  holders  of  original  preferred 
shares. 

The  question  in  the  case  was  whether  these  additional  shares 
were  income,  or  an  enlargement  of  capital,  a  life  tenant  claim- 
ing the  former.  The  court,  however,  thought  the  old  and  the 
new  shares  together  were  principal.  It  was  said  that  "while 
the  association  is  not  a  creature  of  our  statutes  governing  the 
formation  and  powers  of  corporations,  but  is  organized  and 
exists  at  common  law,  there  is  no  ground  for  any  distinction  of 
the  principle  announced  in  our  decisions  that  in  whatever  man- 
ner described  or  apportioned,  an  addition  to  capital  stock  gen- 
erally is  treated  as  capital  belonging  to  the  remainderman,  and 
not  to  the  life  tenant."  This  case  demonstrates,  that  just  as 
a  trust  instrument  is  capable,  originally,  of  being  framed  to 
suit  the  creators  of  the  trust,  so  it  may  be  changed  as  exigency 
demands,  even  to  increasing  the  number  of  its  shares  without 

59Gardiner  v.  Gardiner  (1912),  (Mass.)  99  N.  E.  171. 

OOExhibits,  infra. 

197 


§    130.]  DIVIDENDS.  [CHAP.    XVI. 

additions  to  its  capital,  if  the  equitable  owners  so  desire.  This 
a  corporation  generally  would  not  have  the  right  to  do,  because 
its  original  capital  must  be  divided  into  no  greater  number 
of  shares  than  will  make  up  that  capital.  In  this  case,  for 
example,  a  corporation  would  have  been  compelled  to  do  what 
the  trustees  avoided  doing.  They  advised  that  to  create  a  float- 
ing debt  to  pay  the  arrearage  of  dividends  to  preferred  stock 
would  tend  to  impair  the  credit  of  the  trust,  therefore,  they 
increased  the  number  of  shares  in  trust  assets,  by  consent  of 
shareholders  and  they  avoided  this  result.  Could  a  corpora- 
tion do  the  same  thing?  We  think  not,  because  a  corporation 
trades  on  its  capital,  which  falling  below  the  aggregate  of  its 
shares  would  become  thereby  impaired  and  such  an  arrange- 
ment made  for  paying  dividends  would  be  a  statutory  offense. 
But  a  trust  with  transferable  shares  may  make  the  number  of 
its  shares  as  few  or  as  many  or  increase  or  diminish  them,  as 
contracting  parties  see  fit.  This  demonstrates  that  a  corpora- 
tion trades  on  a  basis  that  may  be  fictitious,  that  is  to  say,  on 
its  capitalization,  for  whether  its  assets  have  increased  or  dimin- 
ished it  must  always  regard  a  dead  line  in  the  payment  of  divi- 
dends. A  trust  in  business  trades  on  its  assets  and  it  is  at 
liberty  to  divide  its  earnings  as  net  or  gross  as  it  pleases,  where 
there  is  no  obligation  to  remaindermen.  Therefore  its  manage- 
ment may  be  with  a  freer  hand  if  that  is  desired,  or  with  a 
stricter  one,  if  it  is  sought  closely  to  restrict  trustees. 

This  theory  suggests  also,  that  if  it  might  be  desired  for  an 
association  to  distribute  assets  as  dividends  and  thus  go  into 
gradual  liquidation  or  because  it  has  more  assets  than  may  be 
profitably  employed  there  is  no  restraint  upon  their  doing  this, 
if  creditors  both  subsisting  and  prospective  are  honestly 
dealt  with.  Conversely  if  it  should  be  desired  to  add  profits  to 
assets  for  any  reason  connected  with  business  needs  this  could 
be  done  at  any  time.61 

Of  course  it  is  to  be  remembered,  that  these  results  must 
be  within  the  purview  of  the  original  trust  instrument,  either 

61  §94  of  this  book  on  the  subject  of  accumulations. 
198 


CHAP,  xvi.]  TRUSTEE'S  COMPENSATION.  [§  131. 

as  it  exists  or  may  be  amended,  for  vested  rights  must  always 
be  respected.  It  is  thought  that  more  minute  suggestions  ought 
not  to  be  made  on  this  subject,  as  each  business  enterprise  de- 
mands its  own  treatment.  It  might  be  provided  as  to  how 
notice  of  payment  of  dividends  should  be  given,  in  what  form 
payment  is  to  be  made  and  evidence  of  receipt  thereof,  by  the 
holders  of  shares. 

§  131.  Trustees'  Compensation. — The  theory  of  securing 
for  the  management  of  trust  estates  absolute  impartiality  has 
formulated  in  English  decision  the  principle  that  a  trustee  can 
"make  no  profit  out  of  his  office."62 

This  means  that  he  is  not  to  be  placed  in  any  position  where 
his  interest  may  be  opposed  to  his  duty.  But  this  principle 
expresses  an  ethical,  rather  than  a  practical,  ideal  and  if  it 
is  not  reasonably  attainable,  it  does  not  demand  that  otherwise 
no  trust  nor  trust  relationship  shall  exist.  Thus  we  perceive, 
that  in  trusteeships  under  statute  the  policy  of  the  law  fixes 
compensation  and  presumes,  that  for  that  compensation  the 
rule  of  responsibility  may  be  more  strictly  applied  than  were 
gratuitous  services  rendered.  It  may  be  remarked,  however, 
in  passing,  that  though  the  ideal  is  that  a  trustee  should  serve 
without  compensation,  yet  the  service  was  so  greatly  connected 
with  the  interests  of  women  and  wards  in  chancery,  thai  it 
never  was  suggested,  that  rigidity  of  conduct  in  gratuitous 
service  by  a  trustee,  made  trustees  stand  like  directors  of  a 
corporation,  as  to  whom  it  was  thought  they  should  be  held 
to  a  less  degree  of  care,  because  their  services  largely  were 
gratuitous.63 

But  this  principle  of  no  compensation  unless  the  trust  instru- 
ment specifically  so  provides  is  not  by  any  means  of  universal 
application.  Indeed  it  has  so  far  fallen  short  in  this  regard  as 

62HPerry   on   Trusts   and   Trustees    (6th   Ed.)    §   904   and   cases 
cited. 

63  §    135,   supra,   especially    Citizens'    Building    Ass'n.    v.     Coriell 
(1881),  34  N.  J.  Eq.  383. 

199 


§  131o.]  TRUSTEE'S  COMPENSATION.  [CHAP.  xvi. 

to  be  called  "the  English  rule"  as  distinguishing  it  from  what 
is  known  as  the  American  rule  which  allows  "courts  of  equity 
to  exercise  a  just  discretion  and  make  or  withhold  allowance 
as  they  consider  the  particular  circumstances  require."64  The 
opinion  in  a  Florida  case  goes  into  an  extended  review  of  the 
English  and  American  cases,  and  shows  that  only  a  very  ftw  of 
the  latter  and  those  very  early  in  our  history  followed  the  form- 
er.65 Thus  in  the  Federal  Supreme  Court,  Justice  Grier  said :  "In 
England  courts  of  equity  adhere  to  the  principle,  which  has 
its  origin  in  the  Roman  law  that  a  trustee  shall  not  profit  by 
his  trust  and  therefore  that  a  trustee  shall  have  no  allowance 
for  his  care  and  trouble.  A  different  rule  prevails  generally, 
if  not  universally,  in  this  country.  Here  it  is  considered  just 
and  reasonable  that  a  trustee  should  receive  a  fair  compensa- 
tion for  his  services,  and  in  most  cases  it  is  gauged  by  a  fair 
percentage  on  the  amount  of  the  estate.66 

There  appears  running  through  American  cases  the  idea, 
that  in  the  absence  of  provision  about  compensation  in  the  trust 
instrument  or  where  such  provision  does  not  fix  the  measure, 
ordinarily  this  is  determined  by  analogy  or  from  statutes  on 
this  subject,67  though  the  circumstances  may  be  looked  to  and 
a  yet  larger  allowance  made  than  is  specifically  provided  for. 
In  England,  however,  compensation  may  be  provided  for  in  the 
trust  instrument. 

§  131a.  Trust  Instrument  Fixing  Amount  of  Compensation. 
— Naturally  as  the  English  rule  is  little  recognized  in  this 
country  provisions  in  trust  instruments  for  compensation  of 
trustees  would  not  receive  particularly  strict  construction.68 

6*  39  Cyc.  481  and  citations. 

65Muscogee    Lumber   Co.    v.    Hyer    (1882),    18    Fla.    698,   43   Am. 
Rep.  332. 

66Barney  v.  Saunders  (1853),  57  U.  S.  (16  How.)  535,  542. 

67Wilder  v.   Hast    (1906),   29   Ky.   L.    Rep.   1181,  96   S.   W.   1106; 
Berry  v.  Stigall  (1907),  125  Mo.  App.  264,  102  S.  W.  585. 

68For    strictness    of    construction    under    the    English    rule,    see 
Clarkson  v.  Robinson   (1900),  2  Ch.  722. 
200 


CHAP,  xvi.]  TRUSTEE'S  COMPENSATION.  [§  131a. 

Also  it  may  be  said,  that  as  the  American  rule  allowed  compen- 
sation, though  not  provided  for  in  a  will  creating  a  trust,  a  for- 
tiori would  a  liberal  construction  be  placed  upon  provision  in 
other  trust  instruments  and  especially  in  one  for  the  carrying 
on  of  business. 

Whenever  the  amount  of  trustee's  compensation  is  by  con- 
tract between  trustee  and  beneficiary  its  reasonableness  is  not 
a  matter  of  inquiry,  as  "such  contracts  are  not  prohibited  by 
law,  and  when  honestly  entered  into  between  trustee  and  bene- 
ficiary the  courts  will  not  interfere  therewith.  ( Bowker  v.  Pierce, 
130  Mass.  262.  )"69  Even  if  the  deed  fixes  the  compensation  and 
it  appears  it  is  too  low  to  procure  competent  persons  as  trustees 
therefor  a  court  of  equity  will  not  allow  the  trust  to  fail  or  be 
administered  less  faithfully  and  will  correct  the  matter  by  al- 
lowing additional  compensation,70  or  if  a  supplemental  agree- 
ment add  other  duties  than  under  the  original  trust  additional 
compensation  may  be  allowed.71 

Thus  it  is  seen,  that  in  trusts  of  the  nature  this  work  treats 
it  is  advisable  that  provisions  be  specific  as  to  amount  of  com- 
pensation to  be  allowed  trustees,  making  such  a  definite  expense 
of  the  business.  This  indeed  is  the  only  way  for  any  determina- 
tion to  be  reached  as  to  what  are  the  earnings  to  be  distributed 
among  the  cestuis.  Of  course,  it  may  be  provided  that  com- 
pensation shall  be  fixed  for  a  time  less  than  the  trust  term,  and 
then  rearranged  by  resolution  at  a  meeting,  regular  or  special, 
of  the  cestuis.  But  in  one  way  or  other  the  amount  should  be 
determined  in  advance  of  the  rendition  of  service  for  a  particu- 
lar period,  so  that  there  will  be  no  occasion  for  application  to 
a  court  of  equity  on  this  point. 

As  appointees  of  trustees  are  their  officers  and  agents,  whose 

69Ladd  v.  Pigott  (1908),  215  Mo.  361,  370,  114  S.  W.  984.  See 
also  Louisville  Trust  Co.  v.  Warren  (1902),  23  Ky.  L.  Rep.  2118,  66 
S.  W.  644;  Turnbull  v.  Pomeroy  (1885),  140  Mass.  117,  3  N.  E.  15. 

TOBiscoe   v.   State    (1861),  23   Ark.   592. 

TIJarrett  v.  Johnson  (1905),  216  111.  212,  74  N.  E.  756. 

201 


§  131a.]  TRUSTEE'S  COMPENSATION.  [CHAP.  xvi. 

compensation  is  paid  by  the  trust  estate  it  will  be  a  matter  for 
consideration  how  far  it  should  be  left  to  the  discretion  of  the 
trustees  to  fix  their  salaries  and  the  periods  of  employment.  It 
is  suggested  that,  as  trustees  should  make  reports  on  all  these 
matters  to  the  shareholders,  their  discretion  in  this  regard  greatly 
should  not  be  fettered. 

It  is  for  another  reason  highly  important  that  the  trust  instru- 
ment in  the  business  trust  should  be  specific  as  to  compensation 
of  trustees,  because  statutes  as  to  compensation  contemplate  an 
ordinary  trust  with  income  such  as  rent  or  interest  and  not  of 
a  trust  in  business  for  profits,  whose  transactions  run  into  enor- 
mous sums  of  money  both  as  to  receipts  and  disbursements.  It 
is  certain,  however,  that  even  with  trusts  of  the  ordinary  kind 
the  statute  may  be  displaced  by  contract  between  parties  sui 
juris,72  and  so  much  the  more  would  this  be  true  as  to  these 
trusts  scarcely  within  the  purview  of  such  statutes. 


T2Bowker  v.  Pierce   (1881),  130  Mass.  262;  Louisville  Trust  Co. 
v.  Warren  (1902),  23  Ky.  L.  Rep.  2118,  66  S.  W.  644. 
202 


CHAPTER  XVII. 
PROTECTION  OF  CESTUIS'  INTERESTS. 

§  132.  Preliminary. — Generally,  the  rights  of  a  cestui  que 
trust  are  only  such  as  are  necessary  for  his  protection  in  se- 
curing what  is  due  him  from  the  trust  estate.  He  has  no  inter- 
est in  the  property  itself;  and  the  kind  of  trust  treated  in  this 
book  seeks  to  emphasize  his  lack  of  control  or  management. 
He  is  a  mere  claimant  against  the  trustee,  with  a  right  to  follow 
the  trust  property.  Exceptionally,  as  in  the  case  of  an  account 
stated,  he  has  an  action  of  law  against  the  trustee,1  but  generally 
his  remedy  is  in  equity.  We  have  seen  that  if  the  trustee's  acts 
are  inconsistent  with  his  duties  to  the  trust  he  may,  at  the  in- 
stance of  the  cestui,  be  removed.2  The  rights  of  the  cestui  to  in- 
formation and  accountings,  to  protection  when  the  trustee  is 
dealing  with  him  and  with  the  trust  assets,  his  right  to  pledge 
his  shares,  and  to  hold  meetings  are  considered  in  this  chapter. 

It  is  thought  that  provisions  in  these  trusts  for  annual  reports, 
for  meetings  of  the  cestuis,  and  for  periodical  selection  of  trus- 
tees is  merely  an  orderly  method  of  doing  what  every  cestui 
has  the  right  to  have  done.  In  other  words,  there  is  not  at- 
tempted to  confer  any  new  rights,  but  only  to  provide  efficient 
machinery  for  the  orderly  observance  of  old  rights. 

This  situation  of  a  business  wherein  profits  go  to  cestuis,  who 
select  trustees,  keep  informed  as  to  their  operations,  remove 
them  on  occasion,  and  otherwise  see  that  the  business  results 
to  their  benefit,  without  said  cestuis  being  liable  for  the  acts  or 
omissions  of  trustees,  is  not  unique  in  law  or  in  common  ex- 
perience. Merely  by  way  of  illustration,  the  position  of  owner 
and  independent  contractor  may  be  instanced.  Here  the  owner 
gets  the  benefit,  he  may  remove  the  contractor,  or  provide  for 
successive  contractors,  he  sees  -that  the  work  comes  up  to 
specifications  and  that  the  contractor  performs  it  honestly,  and 
yet  because  he  exercises  no  supervision  over  the  contractor's 

l§85,   supra. 

2§§  85,  118,  supra. 

203 


§    133.]  PROTECTION    OF    CESTUIS.  [CHAP.    XVII. 

actual  manner  of  doing  the  work,  he  cannot  be  rendered  liable 
either  for  the  contractor's  contracts  or  torts.  This  illustration 
might  be  carried  as  a  further  parallel  when  the  lien  against  the 
owner's  property  is  looked  to  as  a  basis  of  credit,  just  as  those 
dealing  with  a  trust  estate  may  have,  as  stated  by  Lord  Eldon, 
"something  very  like  a  lien"  on  the  trust  estate  embarked  in 
trade.  The  status  of  trustee  and  cestui  as  herein  expounded  is 
less  extreme  than  that  of  owner  and  independent  contractor, 
because  the  cestui  is  not  only  divested  of  control,  but  he  has 
no  legal  title  to  the  property  dealt  with  whatsoever. 

In  order  to  compare  the  protection  of  cestuis  que  trust,  and  of 
stockholders  in  a  corporation,  with  reference  to  their  respective 
interests,  the  status  of  corporate  stockholders  is  set  forth  at 
length.  For  brevity  the  term  "stockholders"  is  used  to  denote 
owners  of  shares  in  a  corporation,  and  the  term  "certificate 
holders"  to  denote  the  owners  of  interests  in  a  trust  represented 
by  transferable  shares. 

§  133.  Status  of  Stockholders. — As  a  corporation  is  a  crea- 
ture of  statute,  it  necessarily  follows  that  the  methods  and  limits 
of  its  activity,  the  means  of  its  creation  of  capital,  by  whom  it 
shall  be  managed  and  how  interest  therein  may  be  acquired  or 
lost,  are  also  under  statutory  control.  Wherein,  however,  statute 
may  be  wanting  in  specific  provisions,  it  must  be  conceded,  that 
courts  have  applied  principles  of  settled  law  to  the  protection 
of  valuable  rights  acquired  in  the  formation  of  a  corporation. 
In  this  sense  it  has  been  held  that:  "The  stockholders  are  the 
equitable  owners  of  the  corporate  property,"3  which  principle, 
however,  militates  in  no  way  against  any  corporation  dealing 
with  that  property,  within  the  limits  of  its  charter  powers  as 
its  own.  Nor  is  there  any  relationship  between  a  stockholder 
and  a  corporation,  such  as  that  between  a  trustee  and  a  cestui 
que  trust,  which  may  prevent  them  dealing  with  each  other  as 
strangers4,  no  one,  indeed,  having  the  right  to  assail  transactions 

SMartin  v.  Niagara  Falls  Paper  Mfg.  Co.  (1890),  122  N.  Y.  165, 
25  N.  E.  303. 

^Bramblet  v.  Commonwealth  Land  &  Lumber  Co.  (1904),  27 
Ky.  Law  Rep.  878,  83  S.  W.  599;  Moore  v.  Universal  Elevator  Co. 
(1899),  122  Mich.  48,  60;  80  N.  W.  1015. 

204 


CHAP.   XVII.]  STATUS  OF  STOCKHOLDERS.  [§   133. 

between  them  except  as  fraud  between  the  two  may  have  affected 
cither's  interests.5  No  admissions  or  declarations  of  one  bind 
the  other,  except  that  the  stockholder's  ultimate  rights  may  be 
affected  in  the  value  of  his  shares,  and  notice  to  one  is  not 
notice  to  the  other  in  any  other  sense.  In  a  word  the  stock- 
holder is  an  individual  distinct  from  the  corporation  in  its  con- 
tracts and  transaction  of  business.  Thus  it  comes  about  that 
whatever  may  be  the  character  of  property  to  which  a  corpor- 
ation has  title,  a  stockholder's  interest  is  personal  property,6  be- 
cause as  long  as  the  corporation  exists  it  is  accountable  to  its 
stockholders  for  no  part  of  any  of  its  property,  but  only  for 
such  profits  as  it  earns  from  the  use  of  all  the  property  the 
title  to  which  it  owns.  When,  however,  a  corporation  fails 
for  some  reason  to  attain  the  object  of  its  creation  or  by  the 
abuse  or  transcending  of  its  powers  diverts  the  property  vested 
in  it,  the  beneficiaries  of  that  use  may  either,  under  specific  pro- 
visions of  statute  or  by  aid  of  chancery,  divest  that  title  and 
distribute  its  former  assets,  subject  to  claims  the  corporation 
has  lawfully  created.  Equally  as  distinct,  as  are  stockholders 
and  corporation  during  its  life  and  fulfilling  the  purpose  of  its 
creation,  are  stockholders  from  each  other  so  far  as  their  per- 
sonal rights  and  liabilities  are  concerned.  They  are  not  partners 
in  any  sense.  As  incident  to  stockholding  they  are  given,  col- 
lectively, certain  statutory  powers  and,  severally,  other  powers 
against  a  corporation  or  its  officers.  But  the  strictly  fiduciary 
relation  of  a  corporation  to  its  stockholders  may  be  said  to 
depend  either  upon  its  abusing  its  powers  or  as  that  relation 
may  incidentally  arise  between  any  two  persons  otherwise  wholly 
apart  one  from  the  other.  Thus  it  has  been  said:  "A  well 
settled  qualification  of  a  rule  that  a  corporation  does  not  stand 
in  a  fiduciary  relation  to  its  shareholders,  but  that  they  may 
deal  with  each  other  at  arms'  length,  in  the  absence  of  fraud, 
is  that  a  corporation  is  a  trustee  for  its  shareholders  for  the 
purpose  of  protecting  their  titles  to  their  shares ;  and  to  this  end 

SGreat   Wfestern   Mining   &   M.fg.    Co.   v.    Harris,    128    Fed.   321, 
63  C.  C.  A.  51,  affirmed  (1905),  198  U.  S.  561. 

eCummings  v.  People  (1904),  211  111.  392,  71  N.  E.  1031. 

205 


§   134.]    EXAMINATION   OF  BOOKS   BY  STOCKHOLDERS.    [CHAP.   XVII. 

it  is  bound  to  exercise  reasonable  care  ard  diligence,  and  is 
consequently  responsible  to  a  shareholder,  who  has  lost  his  title 
to  his  shares  through  its  negligence  or  misconduct."7  The  very 
fact,  however,  that  a  corporation  may  be  held  to  respond  out 
of  its  general  assets,  and  thus  affect  the  ultimate  interest  of 
every  shareholder,  for  its  default  as  to  one  or  more,  emphasizes 
the  complete  ownership  and  distinctive  personality  of  a  cor- 
poration. This  trust  principle  arises  out  of  the  corporation 
being  the  custodian  of  the  shares  of  stock  and  bound  to  trans- 
fer them  when  duly  directed  and  not  otherwise,  it  being  generally 
held  that  the  jus  disponendi  as  regards  corporate  shares  is  ab- 
solute. Correlatively  there  is  the  right  to  purchase  such  shares.8 

While  a  default  of  the  kind  referred  to  would  affect  the  in- 
terests of  all  stockholders,  it  would  not  seem  one  for  which  a 
trustee  would  have  any  right  of  indemnity  against  a  trust  estate, 
because  it  is  a  matter  in  which  other  cestuis  would  not  be  con- 
cerned; yet  it  is  not  denied  that  it  might  be  otherwise  provided 
in  a  trust  instrument.9 

§  134.  Examination  of  Books  and  Papers  by  Stockholder. — 
Statutes  provide  in  varying  terms  for  a  stockholder's  right  to 
examine  the  books  and  papers  of  the  corporation.  Except  when 
they  give  an  absolute  right,  without  question  of  the  motive  of 
examination,  they  may  be  deemed  declaratory  of  the  common 
law.  The  U.  S.  Supreme  Court  says  of  this:10  "The  decisive 
weight  of  American  authority  recognizes  the  common  law  right 
of  the  shareholder,  for  proper  purposes  and  under  reasonable 
regulations  as  to  place  and  time,  to  inspect  the  books  of  the 

7  10  Cyc.  614,  citing  numerous  cases. 

SPittsburg  Library  Ass'n.  v.  Mercantile  Library  Hall  Co.  (1899), 
189  Pa.  479,  42  Atl.  142. 

9See  pages  291,  306,  315,  333  of  Exhibits,  infra,  where  language 
seemingly  is  broad  enough  to  save  the  trustee  harmless  from  liability 
for  negligence  in  issuing  or  transferring  certificates. 

lOGuthrie  v.  Harkness  (1905),  199  U.  S.  148,  26  Sup.  Ct.  Rep.  4, 
50  L.  Ed.  130. 

206 


CHAP.  XVII.]  STATUS  OF  CERTIFICATE  HOLDERS.  [§   135. 

corporation  of  which  he  is  a  member  *  *  *  The  rights  of  in- 
spection rests  upon  the  proposition  that  those  in  charge  of  the 
corporation  are  merely  the  agents  of  the  stockholders  who  are 
the  real  owners  of  the  property.  In  issuing  the  writ  of  man- 
damus the  court  will  exercise  a  sound  discretion  and  grant  the 
right  under  proper  safeguards  to  protect  the  interests  of  all  con- 
cerned. The  writ  should  not  be  granted  for  speculative  pur- 
poses or  to  gratify  idle  curiosity  or  to  aid  a  blackmailer,  but  it 
may  not  be  denied  to  the  stockholder  who  seeks  the  information 
for  legitimate  purposes."  It  has  also  been  ruled,  that  it  must 
be  clear  that  the  purpose  is  illegitimate  before  inspection  may 
be  refused  and  the  burden  is  on  the  custodian  of  books  and 
papers  to  prove  a  wrong  purpose.11 

§  135.  Status  of  Certificate  Holders. — In  Chapter  XII  it 
has  been  discussed  whether  a  certificate  holder  has  the  ordinary 
rights  and  remedies  of  cestuis  que  trust,  suing  either  singly  or 
in  behalf  of  others,  accordingly  as  he  complained  of  something 
affecting  the  trust  or  only  his  interest  therein.  As  these  certifi- 
cate holders  resemble  stockholders,  it  is  conceivable  they  may 
have  similar  rights  and  remedies,  or  rather  that  stockholders 
have  rights  similar  to  those  of  cestuis  que  trust,  especially  as  we 
have  just  seen,  that  the  interest  of  a  stockholder  is  equitable 
in  some  sense;  directors  are  likened  to  trustees  and  that  the 
right  of  a  stockholder  to  an  inspection  of  books  and  papers  is 
a  common-law  right,  of  which  statutes  securing  it  are  generally 
but  declaratory.  The  same  rule  of  trusteeship  on  the  part  of 
directors  of  a  corporation  has  been  declared  as  to  directors  of 
an  unincorporated  company.12  In  this  case  the  trustee  seemed 
merely  such  of  a  dry  trust  and  the  acts  complained  of  were  by 
directors  of  the  association  in  their  accounts,  and  it  would  seem 
that  at  least  officers  of  an  unincorporated  association  are  held 
as  stringently  in  an  equitable  way  as  directors  of  a  corporation. 

But  a  late  case  from  Illinois13  suggests,  that  an  even  stricter 

liStone  v.  Kellogg  (1897),  165  111.  192,  46  N.  E.  222,  59  Am.  St. 
Rep.  240. 

12Jn  re.  Fry  (1860),  4  Phila.  129. 

13Holmes  v.  McDonald  (1907),  226  111.  169,  80  N.  E.  714. 

207 


§   135.]  STATUS  OF  CERTIFICATE  HOLDERS.  [CHAP.   XVII. 

rule  would  be  enforced  against  a  trustee  of  an  active  trust  estate. 
In  this  case  the  cestuis  que  trust  were  not  certificate 
holders,  but  they  were  such  in  effect,  because  they  were  merely 
contributors  to  a  trust  fund  with  their  interests  measured  by  their 
contributions,  that  is  to  say,  the  trust  fund  was  created  to  earn 
income  payable  to  subscribers  or  contributors.  The  scheme  was 
to  form  "The  Chicago  Society  for  Savings,"  with  membership 
to  be  by  signing  the  articles  of  agreement  and  making  deposits 
with  the  trustees  who  were  to  manage  its  affairs.  The  trustees 
were  to  serve  "without  the  expectation  of  emolument  and  pledg- 
ing themselves  to  an  upright  and  conscientious  discharge  there- 
of," and  "not  to  be  held  responsible  for  any  loss  which  may 
happen  from  whatsoever  cause,  except  their  wilful,  corrupt  mis- 
conduct, in  which  case  those  trustees  only  who  are  present  and 
guilty  of  such  misconduct  shall  be  answerable  for  the  same." 
Of  the  eleven  trustees  only  three  were  active  and  these  were 
engaged  in  the  banking  business.  The  other  eight  testified  that, 
while  they  assisted  in  creating  the  Society  they  took  no  part  in 
its  affairs  afterwards,  never  investigating  its  securities  nor 
making  any  attempt  to  examine  its  books.  The  banking  busi- 
ness of  the  three  not  prospering,  they  went  into  that  of  stock 
brokerage  also.  One  of  the  eight  advised  them  to  close  their 
banking  business.  He  was  told  they  were  closing  up  the  busi- 
ness of  the  Society  and  later  one  of  their  clerks  told  him  it 
was  closed.  As  a  matter  of  fact  it  was  closed,  except  as  to 
three  accounts  amounting  in  the  aggregate  to  $817.50.  The 
matter  thus  stood  until  the  firm  composed  of  the  three  active 
trustees  was  adjudged  bankrupt.  The  owners  of  these  three 
accounts  sued  the  eight  others  for  an  accounting.  The  Supreme 
Court  reversed  the  lower  court,  holding  them  "jointly  and 
severally  liable  to  these  members  of  the  Society  for  the  amount 
of  their  respective  deposits." 

The  court  in  its  opinion  adopts  the  principle  stated  in  Perry 
on  Trusts,  (4th  Ed.)  Sec.  266:  "When  trustees  have  accepted 
the  office  they  ought  to  bear  in  mind  that  the  law  knows  no 
such  person  as  a  passive  trustee  and  that  they  cannot  sleep  upon 
their  trust.  If  such  trustee  remains  quiet  for  any  reason  and 
208 


CHAP.    XVII.]  RESPONSIBILITY    OF    TRUSTEES.  [§    135. 

suffers  some  other  to  do  all  the  business  he  is  answerable  for 
the  money,  as  if  he  had  conducted  the  business.  If  a  loss  oc- 
curs from  any  want  of  attention,  care  or  diligence  in  him  after 
his  acceptance,  he  may  be  held  responsible  for  failure  to  do  that 
which  he  ought  to  do,  as  well  as  for  his  acts  of  positive  miscon- 
duct. He  must  respond  in  damages  for  any  neglect  of  duty,  ex- 
press or  implied." 

The  opinion  had  said  just  before  this,  that  the  settled  rule  as 
to  directors,  and  officers  of  a  corporation  was  that  of 
"ordinary  care  and  prudence,"  and  that  they  agree  to  "be  liable 
for  gross  negligence."  Farther  on  the  court  pointedly  draws  a 
distinction  as  follows :  "In  our  judgment  the  duties  and  responsi- 
bilities of  the  trustee  herein  partake  more  of  the  character  of 
ordinary  trustees  than  of  bank  directors  or  any  other  officer  of 
an  incorporated  company.  *  *  *  Had  these  men  of  business 
sagacity  been  actively  attentive  to  their  duties,  they  might  all 
have  known,  long  before  the  failure  as  to  the  condition  of  (this 
firm)  and  withdrawn  their  deposit." 

In  this  case  it  is  perceived,  that  a  rule  of  stricter  responsibility 
was  in  the  mind  of  the  court  than  that  governing  directors  of  a 
corporation,  and  that  its  application  was  necessary  to  enable 
these  cestuis  que  trust  to  recover. 

Considering  also  that  the  Illinois  Court  was  construing  the 
ruling  of  the  U.  S.  Supreme  Court,  as  to  the  responsibility  of 
one  director  for  the  acts  of  other  directors,  of  a  corporation, 
which  could  only  arise  where  the  wrongful  acts  of  the  others 
were  caused  by  the  neglect  of  a  passive  director,14  the  Illinois 
case  is  especially  forceful  in  presenting  the  distinction  here 
sought  to  be  emphasized. 

Among  other  language  approved  in  Briggs  v.  Spaulding,  supra, 

was  that  taken   from  a  Pennsylvania  case15  as  follows:  "We 

are  dealing  now  with  their  responsibility  to  stockholders,  not 

14Briggs  v.   Spaulding   (1891),   141   U.   S.   132,   11   Sup.   Ct.   Rep. 

924,   35   L.   Ed.   662. 

iSSpering's  Appeal  (1872),  71  Pa.  St.  11. 

209 


§    135.]  RESPONSIBILITY   OF  DIRECTORS —  [CHAP.    XVII. 

to  outside  parties  creditors  or  depositors.  Upon  a  close  exam- 
ination of  all  the  reported  cases,  although  there  are  many  dicta 
not  easily  reconcilable,  yet  I  have  found  no  judgment  or  decree 
which  has  held  directors  to  account,  except  when  they  have 
themselves  been  personally  guilty  of  some  fraud  on  the  corpor- 
ation or  have  known  and  connived  at  some  fraud  in  others,  or 
where  such  fraud  might  have  been  prevented  had  they  given 
ordinary  attention  to  their  duties.  *  *  *  It  is  evident  that  gentle- 
men selected  by  the  stockholders  from  their  own  body  ought 
not  to  be  judged  by  the  same  strict  standard  as  the  agent  or 
trustee  of  a  private  estate.  Were  such  a  rule  applied,  no  gentle- 
men of  character  or  responsibility  would  be  found  willing  to 
accept  such  places." 

Also,  in  Briggs  v.  Spaulding,  this  more  emphatic  language 
is  approved:  "Whatever  may  be  the  case  with  the  trustee,  a 
director  cannot  be  held  liable  for  being  defrauded;  to  do  so 
would  be  intolerable."16  And  this:  "One  must  be  very  careful 
in  administering  the  law  of  joint  stock  companies  not  to  press 
so  hard  on  honest  directors  as  to  make  them  liable  for  these 
constructive  defaults,  the  only  effect  of  which  would  be  to 
deter  all  men  of  any  property,  and  perhaps  all  men  who  have 
any  character  to  lose,  from  becoming  directors  of  a  company 
at  all.  *  *  *  Wilful  default  no  doubt  includes  the  case  of  a  trus- 
tee neglecting  to  sue  though  he  might  by  suing  earlier  have 
recovered  a  trust  fund — in  that  case  he  is  made  liable  for  want 
of  due  diligence  in  his  trust.  But  I  think  directors  are  not  li- 
able on  the  same  principle."17 

In  a  New  Jersey  case,18  the  theory  of  a  less  stringent  respons- 
ibility in  regard  to  directors  is  thus  expressed:  "These  directors 
serve  without  pay.  They  were  selected  by  their  fellow  stock- 
holders to  manage  gratuitously  the  affairs  of  the  association  in 

16Land  Credit  Company  v.  Fermoy  (1870),  L.  R.  5  Ch.  Appeal 
Cases  763,  772. 

17In   re.   Forest   of   Dean   Coal   Min.   Co.    (1878),    L.    R.    10   Ch. 
Div.  450,  451. 

ISCitizens'  Building  Ass'n.  v.  Coriell   (1881),  34  N.  J.  Eq.  383. 
210 


CHAP.   XVII.]  — AND  TRUSTEES  COMPARED.  [§   135. 

which  they  and  the  other  stockholders  were  jointly  interested. 
To  apply  to  them  the  strict  rules  which  are  applicable  to  trustees 
who  assume  the  discharge  of  the  duties  of  private  trusts  would 
be  unjust." 

In  a  New  York  case,19  cited  with  approval  in  Briggs  v. 
Spaulding,  supra,  a  purchaser  of  corporate  stock  relying  on  a 
statement  in  the  printed  business  cards  of  a  corporation  of 
"cash  capital  $150,000,"  when  the  company  neither  had  or  had 
ever  had  any  such  capital,  sued  one  of  the  directors,  whose 
name  appeared  on  such  cards  as  a  director.  It  was  shown  that 
defendant  became  a  director  a  few  months  after  the  organiza- 
tion of  the  corporation,  and  that  he  did  not  know  the  represen- 
tations were  untrue,  but  had  no  good  reason  to  believe  them 
true  and  made  no  inquiries  to  ascertain  their  truth,  but  allowed 
his  name  to  be  used  without  reflection  as  to  the  effect.  He 
was  held  not  liable  to  the  stockholder  for  his  purchase  of  worth- 
less stock.  The  opinion  pursued  the  same  reasoning  as  that  al- 
ready shown  in  extracts,  supra.  It  was  said:  "They  (directors) 
publish  their  statements  and  reports,  relying  upon  the  facts  and 
figures  furnished  by  such  agents/'  and  it  was  thought  that  no 
rule  of  public  policy  required  directors  should  be  in  "constant 
peril"  of  others  being  deceived  thereby.  It  is  readily  perceived 
that  the  trustee  of  a  private  trust  would  not  be  thus  excused. 

How  differently  is  the  matter  in  the  case  of  a  private  trust 
is  well  exemplified  in  English  cases.  Thus  where  a  cestui  de- 
sired to  effect  a  loan  on  his  income  and  referred  to  the  trustee 
for  inquiry,  a  statement  was  made  by  the  trustee  in  good  faith, 
but  the  lender  being  misled  thereby  the  trustee  was  made  re- 
sponsible. The  court  said:  "I  think  it  is  clearly  settled  by 
authority,  that  when  a  trustee  is  applied  to  for  information 
with  regard  to  incumbrance  on  his  trust  fund,  and  he  gives  a 
distinct  answer  that  there  is  nothing  of  the  sort,  the  fact  that 
he  has  forgotten  the  existence  of  an  incumbrance  is  no  excuse 
for  him  whatever."20 

l»Wakeman  v.  Dalley   (1872),  51  N.  Y.  27. 

20Low  v.  Bouverie   (1891),  3  Ch.  82.     See  also  In  re.  Dartnell 
<1895),  1  Ch.  474;  Re.  Skinner  (1904),  1  Ch.  289. 

211 


§    135.]  RESPONSIBILITY   OF  DIRECTORS [CHAP.    XVII. 

In  a  Georgia  case,21  there  is  quoted  from  2  Spence's  Eq.  Jur. 
921  as  a  correct  statement  of  a  rule  the  following:  "A  trustee 
is  bound  to  render  every  necessary  information  that  is  required 
of  him,  and  he  who,  undertaking  to  give  information,  gives  but 
half  information,  in  the  view  of  a  court  of  chancery,  conceals ; 
if  he  has  not  all  the  information  necessary,  he  is  bound  to  seek 
first,  and  if  practicable  obtain  it."  The  court  added  to  this 
statement  the  following:  "That  concealment  per  se  amounts  to 
actual  fraud,  when,  from  any  reason,  one  party  has  the  right  to 
expect  full  communication  of  the  facts  from  another,  is  a  well 
settled  principle,  recognized  by  both  the  civil  and  the  moral 
law." 

The  duty  of  a  trustee  and  the  right  of  a  cestui  que  trust  are 
well  summarized  in  a  Michigan  case22  as  follows:  It  was  said 
there  were  certain  rules  "so  long  established  both  in  England 
and  in  this  country  that  a  departure  therefrom  has  come  to  be 
regarded  as  a  want  of  capacity  or  dishonesty  in  a  court  which 
fails  to  apply  them."  One  of  these  rules  "required  the  trustee 
at  all  times  to  keep  his  accounts  with  the  several  interests  be- 
longing to  the  trust  in  such  manner  that  he  could,  when  properly 
called  upon,  give  those  who  were  interested  in  the  estate,  the 
situation  of  the  estate  and  all  the  information  he  could  of  inter- 
est to  them  during  the  progress  of  its  settlement;  and  allow 
them  and  their  attorneys,  who  were  acting  in  good  faith,  oppor- 
tunities to  inspect  the  books  and  papers  and  all  records  relating 
to  the  estate." 

A  New  York  case,23  used  the  following  language  as  to  such 
duties  and  rights:  "The  plaintiff  being  interested  in  the  property 
which  is  to  be  converted  into  money  and  invested  for  her  bene- 
fit, she  has  a  right,  although  the  trustee  is  acting  in  good  faith 
and  is  exercising  the  discretion  vested  in  him  wisely  and  prop- 
erly, to  call  upon  him  from  time  to  time,  to  disclose  to  her  the 
nature  and  character  of  the  property  in  his  hands  constituting 

2lPoullain  v.  Poullain  (1886),  76  Ga.  420,  446. 
22Ferrin  v.  Lepper  (1888),  72  Mich.  454,  543. 
23Hancox  v.  Wall  (1882),  28  Hun  214,  218. 


CHAP.   XVII.]  — AND  TRUSTEES   COMPARED.  [§    135. 

the  trust  fund,  to  show  its  value,  the  income  derived  therefrom 
and  the  expenses  to  which  the  trustee  is  subjected  in  its  man- 
agement." 

Indeed  the  whole  matter  appears  susceptible  of  the  statement 
that  the  policy  of  the  law  is  not  the  establishment  of  the  same 
relation  of  trust  and  confidence  between  a  stockholder  and  a 
director  of  a  corporation  that  exists  between  a  trustee  and  a 
cestui  que  trust,  for  were  the  same  high  degree  of  care  required 
of  a  director  as  of  an  ordinary  trustee,  men  of  character  and 
responsibility  could  not  be  found  to  fill  the  office  of  director. 
Any  such  reason  for  abating  from  the  responsibility  of  a  trus- 
tee, however,  is  repugnant  to  equity,  and  if  holders  of  transfer- 
able shares  seek  to  establish  such  a  relationship  with  the  man- 
agers of  the  property  in  which  these  shares  represent  interests 
they  have  the  undoubted  right  to  their  choice.  But  stockholders 
are  limited  in  this  regard  by  the  policy,  which  creates  a  cor- 
poration. If  certificate  holders  are  investors  in  a  trust  instead 
of  a  corporation,  courts  will  not  practically  abolish  the  trust 
by  treating  it  as  a  corporation.  That  would  be  to  make  con- 
tracts for  certificate  holders,  into  which  they  never  entered  and 
to  take  away  rights  they  would  otherwise  enjoy. 

§  136.  Relation  Between  Stockholders  of  a  Corporation  and 
its  Managers. — It  should  not  be  deemed  necessary  to  more  than 
formulate,  or  quote  a  formulation  of,  the  well-settled  rule  of 
a  trustee's  relationship  and  duty  to  his  cestui  que  trust.  The 
latter  course  is  pursued  in  adopting  the  words  of  Sanborn,  Cir- 
cuit Judge,  as  follows :  "A  trustee  or  an  agent  may  purchase  the 
trust  property  directly  from  his  cestui  que  trust  sui  juris  or 
principal,  on  the  condition,  that  the  latter  intends  that  the 
former  shall  buy,  that  the  former  discloses  to  the  latter,  before 
the  contract  is  made,  every  fact  he  has  learned  in  the  fiduciary 
relation,  which  is  material  to  the  sale,  that  he  exercises  the  ut- 
most good  faith,  that  no  advantage  is  taken  by  misrepresenta- 
tion, concealment  of,  or  omission  to  disclose,  important  infor- 
mation gained  as  trustee  or  agent,  and  that  the  entire  transaction 

213 


§   136.]      DIRECTORS  DEALING   WITH   STOCKHOLDERS.       [CHAP.   XVII. 

is  fair  and  open."24  This  would  seem  to  follow  from  the  cases 
in  the  preceding  section.  That  a  director  or  other  officer  of 
a  corporation  is  bound  to  no  such  strictness  in  purchasing  the 
shares  of  another  stockholder  seems  plainly  deducible  from 
many  cases  on  this  subject.23  Thus  it  has  been  said  of  a  direc- 
tor that:  "His  obligation  to  the  company  overrides  that,  to 
an  individual  holder  of  stock,"26  a  principle  true  perhaps  as  to 
a  trustee,  in  the  sense  that  he  can  discriminate  in  favor  of  no 
single  cestui  que  trust,  but  it  is  impossible  to  conceive  him 
having  a  superior  obligation  to  a  trust  estate  than  to  cestuis  as 
a  body.  But,  if  either  a  director  or  a  trustee  may  treat  stock- 
holders or  shareholders  severally  than  as  Judge  Sanborn  states, 
he  may  do  the  same  with  them  collectively.  A  sum  is  merely 
the  aggregate  of  units. 

There  are  a  number  of  cases  treating  of  purchases  of  stock 
by  directors  and  managers  of  corporations  from  other  stock- 
holders, in  which  the  principle  of  the  relation  of  trustee  to 
cestui  que  trust  was  invoked  to  set  the  sale  aside  or  give  to 
the  seller  other  relief.  In  some  all  relief  was  denied  and  in 
one  or  two  only  was  it  granted  and  then  because  of  special 
facts.  Taking  the  cases  in  which  relief  was  denied,  as  first  in 
order,  it  is  found  that  they  hold  that  "no  relationship  of  a  fidu- 
ciary nature  exists  between  a  director  and  a  shareholder  in  a 
business  corporation."27  One  of  these  cases  was  decided  by 
the  Supreme  Court  of  Indiana.28  It  was  said  there  the  relation 
of  director  was  "similar  to  that  of  trustees  for  the  shareholders" 
only  "in  reference  to  the  management  by  the  directors  of  the 
property  and  general  affairs  of  the  corporation,"  which  state- 

24Byrne  v.  Jones  (1908),  159  Fed.  321,  323,  90  C.  C.  A.  101. 

25"Liabilities   of   Directors   and   Trustees   to    Beneficial    Owners 
Compared"   (1912),  74  Cent.  L.  J.  360. 

26Qliver  v.   Oliver   (1903),   118   Ga.   362,  368,  45   S.   E.  232. 

27Strong  v.   Repide    (1909),  213  U.   S.   419,  431,   stating  doctrine 
of  those  cases. 

28Board   of   Commissioners   v.   Reynolds    (1873),   44   Ind.   509,   15 
Am.  Rep.  245. 
214 


CHAP.    XVII.]     DIRECTORS    DEALING    WITH    STOCKHOLDERS.     [§    136. 

ment  was  later  approved  in  the  same  court29  and  a  large  number 
of  cases  were  cited  in  support.  The  facts  of  the  former  case 
show  a  county  owned  about  one-ninth  of  the  total  stock  of  a 
railroad  company,  that  its  President  purchased  it  at  ninety  cents 
on  the  dollar  without  revealing  to  the  seller  that  he  was  nego- 
tiating a  sale  of  the  railroad  capitalized  at  $250,000  for 
$2,500,000;  that  the  sale  was  effected,  thereby  making  the 
stock  worth  eleven  hundred  per  cent  more  than  was  paid  for 
it.  The  court,  in  ruling  that  the  county  was  not  entitled  to 
have  the  sale  set  aside,  said:  "We  have  carefully  considered  the 
evidence  in  the  cause,  and  are  satisfied  that  no  actual  fraud 
was  established  in  the  purchase  of  the  stock  by  the  defendant 
from  the  plaintiff.  The  defendant,  doubtless,  knew  much  more 
about  the  condition  of  the  affairs  of  the  company  and  the  value 
of  the  stock,  both  present  and  prospective,  than  the  plaintiff. 
He  purchased  the  stock  greatly  below  its  real  value,  as  subse- 
quent events  established,  but  he  paid  the  market  value  at  the 
time,  so  far  as  it  seems  to  have  had  a  market  value.  It  is  not 
shown  by  the  evidence  that  there  was  any  special  trust  or  con- 
fidence reposed  in  the  defendant  by  the  plaintiff,  which  was 
violated  by  the  former,  or  of  which  he  took  advantage."  The 
court  does  not  pretend  to  say  he  did  not  take  advantage  of  the 
knowledge  he  acquired  as  director,  when  the  only  way  he 
could  buy  was  to  conceal  "the  value  of  the  stock  both  present 
and  prospective,"  a  thing  Judge  Sanborn  thought  would,  in  a 
trustee  or  agent,  be  at  least,  a  fraudulent  "omission." 

This  decision  was  expressly  approved  in  a  New  Jersey  case.30 
It  was  said:  "A  director  or  the  treasurer  of  a  corporation  is 
not,  because  of  his  office,  in  duty  bound  to  disclose  to  an  indi- 
vidual stockholder  before  purchasing  his  stock,  that  which  he 
may  know  as  to  the  real  condition  of  the  corporation  affecting 
the  value  of  that  stock." 

The  relation  between  director  and  stockholder  came  up  in  a 

29Board  of  Commissioners  v.  Lafayette  M.  &  B.  R.  Co.   (1875), 
50  Ind.  85,  97. 

SOCrowell  v.  Jackson  (1891),  53  N.  J.  L.  656. 

%  215 


§    136.]  NO    FIDUCIARY    RELATION —  [CHAP.    XVII. 

New  York  case,  where  stock  purchased  became  of  greatly  in- 
creased value  by  reason  of  facts  not  disclosed  to  the  seller, 
though  known  to  the  purchaser,  the  court  said :  "It  cannot  be 
said  that  Danforth  (the  purchaser)  was  under  a  legal  obligation 
to  say  anything  about  the  affairs  of  the  corporation  or  to  dis- 
close any  fact  or  circumstance  material  on  the  question  of  val- 
ue."31 This  case  has  been  approved  by  a  late  New  York  case, 
in  which  relief  was  extended  to  a  stockholder,  because  the  cor- 
poration was  managed  by  directors  in  conspiracy  to  cause  a 
"freeze  out"  for  their  advantage.  It  was  said  this  was  an 
"affirmative  act  designed  to  injure."32 

In  a  case  decided  by  the  highest  appellate  tribunal  of  New 
York  the  unanimous  opinion  of  the  court  declared:  "The  rela- 
tions of  trust  and  fidelity  existed  between  the  corporation  and 
directors  and  not  between  the  latter  and  the  shareholders."33 
As  the  result  of  such  a  principle  it  was  held  that,  where  a  cor- 
poration in  business  only  one  month  became  financially  wrecked 
by  fraud  and  dishonesty  of  the  President,  Secretary  and  Treas- 
urer, the  directors  being  wholly  quiescent,  the  shareholders  had 
no  cause  of  action  against  the  directors,  there  being  "no  proof 
and  no  charge  of  any  personal  dishonesty  against  any  of  the 
directors,  and  the  negligence  found  consisting  entirely  in  acts 
of  omission,  that  is  in  failing  to  remove  the  delinquent  officers 
or  in  want  of  proper  diligence  in  ascertaining  their  unfitness 
for  the  positions  before  they  were  appointed." 

In  Michigan  it  has  been  said :  "Directors,  of  course,  stand  in 
a  fiduciary  relation  to  the  corporation  itself.  They  do  not  stand 
in  that  relation,  however,  when  dealing  with  other  stockholders 
for  the  purchase  or  sale  of  stock.  In  the  purchase  and  sale 
of  stock  between  stockholders  there  must  be  some  actual  mis- 
representation to  constitute  fraud.  Mere  silence  is  not  suf- 
ficient."34 In  this  same  case  it  was  also  said:  "An  agent  may 

SlCarpenter  v.  Danforth   (1868),  52  Barb.  581. 
32Von  Au  v.  Magenheimer  (1908),  126  N.  Y.  App.  Div.  257. 
33Bloom  v.  Nat'l.  Sav.  &  Loan  Co.  (1897),  152  N.  Y.  114. 
34Walsh  v.  Goulden  (1902),  130  Mich.  531,  539;  90  N.  W.  406. 
216 


CHAP.    XVII.]    BETWEEN   DIRECTORS   AND  STOCKHOLDERS.    [§    137. 

purchase  of  his  principal,  so  long  as  he  acts  in  good  faith,  and 
his  principal  is  informed  of  the  situation." 

In  a  Washington  case  it  was  said:  "The  rule  recognized  and 
adopted  by  the  modern  authorities  is  tersely  stated  by  a  late  text 
writer,  speaking  of  officers  of  private  corporations  as  follows: 
'The  doctrine  that  officers  and  directors  are  trustees  of  the 
stockholders  applies  only  in  respect  to  their  acts  relating  to  the 
property  or  business  of  the  corporation.  It  does  not  extend  to 
their  private  dealings  with  stockholders  or  others,  though  in 
such  dealings  they  take  advantage  of  knowledge  gained  through 
their  official  position.'  "35  This  approved  doctrine  was  quoted,36 
and  many  cases  are  cited  in  its  support.37 

Chief  Justice  Shaw  in  a  leading  case38  said :  "There  is  no 
legal  privity,  relation  or  immediate  connection  between  the 
holders  of  shares  in  a  bank  and  the  directors  of  the  bank.  The 
directors  are  not  the  bailees,  the  factors,  agents  or  trustees,  of 
such  individual  stockholders.  The  bank  is  a  corporation  and 
body  politic,  having  a  separate  existence  as  a  distinct  person  in 
law,  in  whom  the  whole  stock  and  property  of  the  bank  are 
vested,  and  to  whom  all  agents,  debtors,  officers  and  servants 
are  responsible,"  and  from  this  principle  have  grown  up  rulings 
"adopted  by  the  modern  authorities"  as  above  formulated. 

§  137.  Cases  in  Which  Directors  Were  Held  Liable  to  Stock- 
holders.— The  case  of  Strong  v.  Repide39  came  up  from  the 
Supreme  Court  of  the  Philippine  Islands  and  as  the  courts  be- 
low differed  in  the  finding  of  facts  our  Supreme  Court,  under 
Act  of  Congress  for  the  Islands,  was  given  the  right  to  review 
the  facts  for  itself.  Upon  such  review  it  was  held  that  there 

3»O'Neile  v.  Ternes  (1903),  32  Wash.  528,  541;  73  Pac.  692. 

3621  Am.  &  Eng.  Encyc.  898. 

STGillett  v.  Bowen,  23  Fed.  625;  Farmers  etc.  Bank  v.  Wasson, 
48  Iowa  336;  Triseoni  v.  Winship  43  La.  Ann.  45,  26  Am.  St.  Rep. 
175. 

38Smith  v.  Kurd   (1847),   12  Mete.    (Mass.)   371,  384. 

39(1909),   213  U.   S.  419. 

217 


§    137.]  NO   FIDUCIARY    RELATION —  [CHAP.    XVII. 

was  "strong  evidence  of  fraud  on  the  part  of  the  defendant." 
This  defendant  was  the  holder  of  the  majority  of  the  stock  that 
was  about  to  acquire  a  greatly  increased  value  through  nego- 
tiations with  this  government  for  the  sale  of  what  was  called 
"the  friar  lands"  in  the  Philippine  Islands.  He  was  purchasing 
other  stock  and  "concealing  his  identity  so  he  could  by  such 
means  avoid"  inquiry,  etc.  Summarizing  the  facts  the  court 
said:  "If  under  all  these  facts  he  (defendant)  purchased  the 
stock  from  the  plaintiff,  the  law  would  indeed  be  impotent  if 
the  sale  could  not  be  set  aside  or  the  defendant  be  cast  in  dam- 
ages for  fraud.  The  Supreme  Court  of  the  Islands,  in  holding 
that  there  was  no  fraud  in  the  purchase,  said  that  the  respons- 
ibility of  the  directors  of  a  corporation  to  the  individual  stock- 
holders did  not  extend  beyond  the  corporate  property  actually 
under  the  control  of  the  directors;  that  they  did  not  owe  any 
duty  to  the  members  in  respect  of  their  individual  stock  which 
would  prevent  them  from  purchasing  the  same  in  the  usual 
manner.  While  this  may  in  general  be  true,  we  think  it  is  not 
an  accurate  statement  of  the  case,  regard  being  had  to  the 
facts  above  mentioned." 

Here  the  general  rule  is  admitted  of  no  trust  relationship  be- 
tween directors  and  shareholders,  but  there  was  not  mere  silence 
but  a  scheme  to  avoid  disclosure  on  the  part  of  "the  chief  ne- 
gotiator for  the  sale  of  all  the  lands,  acting  substantially  as  the 
agent  of  the  shareholders  of  his  company."  In  other  words,  it 
was  the  agency  relation,  placed  by  Judge  Sanborn,  supra,  on  the 
same  plane  as  trust  relation,  that  entitled  his  principals  to  relief, 
and  not  the  relation  of  director  and  stockholder. 

Judge,  now  associate  Justice,  Lamar  reviews  40  very  thor- 
oughly many  of  the  cases  above  cited  and  agrees  that  they  are 
opposed  to  the  conclusions  he  and  his  associates  reach.  He 
inveighs  strongly  against  such  a  doctrine  as  they  support.  Thus 
he  said:  "To  say  that  a  director  who  has  been  placed  where  he 
himself  may  raise  or  depress  the  value  of  stock,  or  in  a  posi- 
tion where  he  first  knows  of  facts  which  may  produce  that  re- 

40Oliver  v.  Oliver  (1903),  118  Ga.  362,  45  S.  E.  232. 
218 


CHAP.   XVII.]    — BETWEEN  DIRECTORS   AND  STOCKHOLDERS.    [§    138. 

suit,  may  take  advantage  thereof,  and  buy  from  or  sell  to  one 
whom  he  is  directly  representing,  without  making  a  full  dis- 
closure and  putting  the  stockholders  on  an  equality  of  knowl- 
edge as  to  these  facts  would  offer  a  premium  for  faithless  si- 
lence and  give  a  reward  for  the  suppression  of  truth.  It  would 
sanction  concealment  by  one  who  is  bound  to  speak  and  permit 
him  to  take  advantage  of  his  own  wrong — a  thing  "abhorent  to 
a  court  of  conscience." 

All  of  this  is  too  true,  and  it  seems  a  pity  that  Judge  Lamar 
could  call  to  the  support  of  his  views  only  a  short  dissenting 
opinion  by  one  member  of  the  court  in  Board  of  Commissioners 
v.  Reynolds41  and  its  approval  by  Judge  Thompson  who  said 
the  majority  opinion  "proceeds  upon  a  conception  which,  if 
extended,  would  sanction  nearly  all  of  the  fraud  and  injustice 
which  the  managers  of  corporations  have  committed  against 
the  stockholders."42 

In  the  second  edition  of  Judge  Thompson's  work  this  excerpt 
has  been  elided  and  it  is  said:  "The  officers  are  not  bound  to 
acquaint  a  stockholder  willing  to  sell  his  stock  with  facts  which 
would  enhance  the  price  of  the  stock,"43  and  for  this  a  great 
number  of  cases  are  cited  and  to  the  contrary  three  cases44  by 
two  different  courts. 

Stewart  v.  Harris  supra  bases  itself  mainly  on  Oliver  v. 
Oliver  supra  quoting  from  it  extensively  and  says  the  other  rule 
"leaves  the  stockhloders  of  the  corporation  the  legitimate  prey 
of  the  managing  officers."  Stewart  v.  Smith  was  a  companion 
case  to  Stewart  v.  Harris. 

§  138.     Summary. — With  a  great  array  of  authority  support- 
ing the  rule  against  which  Judge  Lamar  and  the  Kansas  Court, 
41(1873),  44  Ind.  509,  15  Am.  Rep.  245. 
423  Thomp.  Corp.   (1st   Ed.)  4034. 
434  Thompson  Corp.   (2nd  Ed.)   4031. 

44Qliver  v.  Oliver,  supra;  Stewart  v.  Harris  (1904),  69  Kan.  498. 
77  Pac.  277,  105  Am.  St.  Rep.  178,  66  L.  R.  A.  261;  Stewart  v.  Smith 
(1905),  72  Kan.  77,  82  Pac.  482. 

219 


§  139.]        TRUSTEE'S  ON  HIS  OWN  ACCOUNT —        [CHAP.  xvn. 

following  him  alone  squarely  contend,  it  may  be  said  that  the 
weight  of  authority  is  such,  that  a  legitimate  investor  in  the 
stock  of  a  corporation  takes  a  heavy  risk  against  the  cupidity  of 
its  managing  officers.  Trusteeship  in  a  director  even  as  to  the 
corporation  is  shown  not  to  be  nearly  as  strict  as  is  that  of  an 
agent  or  ordinary  trustee  and  denied  altogether  so  far  as  in- 
dividual stockholders  are  concerned. 

§  139.  Trustees  Selling  or  Purchasing  From  or  Dealing  With 
the  Trust  Estate. — Interposition  of  Third  Parties  or  "Dummies." 
— We  have  seen  that  there  is  not  an  absolute  inhibition  against 
a  trustee  dealing  on  his  own  account  with  his  cestuis  or  the  trust 
fund,  but  it  is  held  that  the  burden  is  on  the  trustee  to  prove 
the  bona  fides  of  any  such  transaction.45  We  have  seen  that 
this  applies  to  dealings  between  the  cestui  and  trustee  in  the 
purchase  of  property  by  the  trustee  from  said  cestui. 

All  such  transactions  call  for  an  application  of  great  moral  prin- 
ciples which  come  to  us  from  antiquity  and  are  variously  ex- 
pressed in  several  maxims,  i.  e.,  "No  one  can  be  judge  in  his 
own  cause"  (Nemo  debet  esse  judex  in  propria  sua  causa),  "To 
be  at  once  the  person  acting  and  the  person  acted  upon  is  im- 
possible." (Idem  agens  et  patiens  esse  non  potest.)  "The  buyer 
buys  for  as  little  as  possible,  the  vendor  sells  for  as  much  as 
possible"  (Emptor  emit  quam  minimo  potest;  venditor  vendit 
quam  maximo  potest.)  "You  cannot  serve  two  masters."  "You 
cannot  serve  both  God  and  Mammon."46 

All  that  this  amounts  to  is  that  one  having  an  interest  opposed 
to  his  duty  may  prefer  the  former  to  the  latter.  Courts  of 
equity,  taking  into  account  human  frailty,  have  declared  as  a 
rule  that  fraud  is  presumed  and  the  burden  is  upon  the  trustee 
to  show  a  transaction  fair,  when  interest  and  duty  conflict.  In 
corporation  law,  it  has  been  a  difficult  task  to  apply  satisfactory 
remedies,  and  the  most  that  has  been  done  is  to  disregard  corpor- 
ate entities  in  some  cases  of  fraud,  and  to  apply  the  above  rule, 

45Byrne  v.  Jones  (1908),  159  Fed.  321,  323,  90  C.  C.  A.  101. 
46Hughes'   "Equity   in   Procedure",   §§   511-522. 
220 


CHAP.    XVII.]  — DEALING    WITH    TRUST    ASSETS.  [§    139. 

by  analogy,  but,  generally,  the  burden  of  proof  has  been  upon 
those  injured  and,  the  facts  being  so  peculiarly  within  the  knowl- 
edge of  defrauding  officers,  actions  for  relief  often  have  proven 
illusory. 

The  spirit  of  the  rule  that  you  cannot  serve  two  masters  is 
frequently  violated  as  to  corporations  in  various  ways.  One 
of  these  devices  is  to  use  "dummies"  that  is  to  say,  persons  act- 
ing under  no  independent  judgment  but  at  the  dictation  of 
others.  By  this  means  properties  are  taken  over  by  a  corpor- 
ation at  the  price  dictated  by  the  sellers,  or  valuable  interests  of 
a  going  concern  are  sold  or  leased  out  to  an  "inside"  company, 
officered  by  "dummies",  whose  stock  is  really  owned  by  the 
"insiders"  controlling  a  plundered  corporation,  or  some  supply 
corporation  is  organized  with  "dummies"  to  further  assist  in  the 
making  of  dividends  for  the  "insiders"  at  the  expense  of  stock- 
holders, who  unwittingly  engineer  their  own  loss  by  placing 
officers  on  the  "inside"  who  secretly  betray  the  corporation  they 
represent.  Where  it  is  necessary  for  the  "dummy"  to  hold 
stock,  shares  are  issued  to  him,  with  the  certificate  therefor  in- 
dorsed in  blank,  and  left  in  the  keeping  of  the  real  parties  in 
interest.  The  books,  of  course,  show  ownership  in  the  "dum- 
my". The  real  owners  practically  take  no  risk  from  any  asser- 
tion of  independence  by  the  "dummy".  His  responsibility  cuts 
no  figure,  indeed  the  more  irresponsible  he  is  the  better.  He 
has  no  hold  on  his  associates.  He,  usually,  gets  no  dividends 
on  the  stock  he  apparently  owns,  and  his  qualification  under  the 
statute  may  be  destroyed  whenever  the  holder  fills  out  the  blank 
indorsement  and  transfers  the  stock. 

How  strict  is  the  rule  of  trusteeship  and  the  burden  upon 
the  trustee  to  show  a  course  of  honest  conduct  is  in  sharp  con- 
trast to  this  use  of  dummies.  As  stated  in  a  great  Federal 
case,47  wherein  the  authorities  in  England  and  the  United  States 
were  exhaustively  reviewed:  "The  rule  of  equity  is  in  every 
code  of  jurisprudence,  with  which  we  are  acquainted,  that  a 
purchase  by  a  trustee  or  agent  of  the  particular  property  of 

47Michoud  v.  Girod  (1846),  45  U.  S.   (4  How.)  503,  553. 

221 


§'  140.]  'TRUSTEE  AS  ONE  OF  CESTUIS.  [CHAP.  XVII. 

which  he  has  the  sale,  or  in  which  he  represents  another,  wheth- 
er he  has  an  interest  in  it  or  not,  per  interpositam  personam 
(through  the  interposition  of  a  third  person,)  carries  fraud  on 
the  face  of  it."  Hence  it  is  seen  that  fraud  is  presumed  and  the 
burden  of  explanation,  if  any  can  be  made,  is  upon  those  best 
able  and  justly  required  to  produce  it. 

§  140.  Trustee  as  One  of  Cestuis. — While  it  has  been  shown 
that  a  trustee  must  act  with  an  eye  single  to  the  interests  of  the 
trust  committed  to  his  charge  and  that  he  will  not  be  permitted 
to  take  any  advantage  of  knowledge  gained  by  him  in  the  ad- 
ministration of  the  trust  estate  in  dealing  with  a  cestui,  yet  it 
has  not  been  supposed,  that  himself  being  a  cestui  is  opposed  to 
his  acting  with  perfect  fidelity  to  his  trust  and  the  consequent 
benefit  of  his  co-cestuis.48  Indeed,  it  has  been  shown  that  he 
may  deal  with  a  cestui,  provided  he  places  him  on  a  full  equality 
with  himself  as  to  knowledge,  and  if  he  does  this,  opposition  in 
interest  can  arise  between  him  and  other  cestuis  no  more  than 
where  an  agent  deals  with  his  principal  as  to  the  subject  matter 
of  the  agency. 

Thus  we  have  seen  that  courts  have  recognized  that  a  bene- 
ficiary under  a  testamentary  trust  may  qualify  as  one  of  several 
trustees.49  The  court  said:  "Trusts  thus  constituted  are  quite 
common,  and  although  the  trustees  other  than  the  beneficiary 
may  die  or  decline  to  act,  the  court  has  power  to  supply  their 
place  or  if  need  be,  take  upon  itself  the  execution  of  the  trust, 
so  far  as  it  ought  not  to  be  executed  by  the  trustee  who  is  also 
beneficiary."  This  happened  in  this  case  and  "the  court  substi- 
tuted its  own  discretion  for  that  of  the  trustee."  Heard  v. 
March,  supra,  illustrates  that  where  the  acts  to  be  done  do  not 
involve  the  exercise  of  any  discretion  to  be  affected  one  way  or 
the  other  by  the  trustee's  personal  interest  he,  though  a  bene- 

48Heard  v.  March  (1853),  12  Cush.  (Mass.)  580.  "In  promoting 
the  interests  of  the  company  they  to  so  great  an  extent  promoted 
their  own,"  was  said  of  trustees  in  this  case,  who  owned  a  majority 
of  the  certificates  of  the  trust. 

49Rogers  v.  Rogers  (1888),  111  N.  Y.  228. 
222 


CHAP.  XVII.]  INFORMATION  FROM  TRUSTEES.  [§   141. 

ficiary,  stands  precisely  like  any  other  trustee.  Thus  two  of 
three  trustees  owned  three-fourths  of  the  shares  and  the  trust  in- 
strument provided  that  such  an  interest  could  direct  a  sale,  the 
fact  of  the  third  trustee  not  joining  in  the  deed  did  not  invali- 
date it.  It  was  said,  however,  that  ordinarily  the  third  trustee 
should  have  been  advised  with  and  consulted  or  a  court  of 
equity  would  have  power  to  set  aside  the  deed.  This  case  but 
illustrates  the  principle,  that  discretion  reposed  in  trustees  must 
be  consulted,  unless  specific  directions  as  to  a  particular  thing 
renders  this  unnecessary.  The  other  case  shows,  that  if  personal 
interest  may  interfere  with  that  discretion,  either  the  court  will 
step  in  and  substitute  its  discretion  for  that  of  the  trustee  or 
other  trustees  will  act  for  the  trust  estate. 

§  141.  Information  From  Trustees, — It  has  been  shown 
hereinbefore  that  the  relation  of  trustee  and  cestui  que  trust  is 
one  of  trust  and  cpnfidence  and  that  the  former  must  always 
give  information,  when  properly  applied  to,  to  the  latter  about 
the  affairs  of  the  trust.  A  strong  illustration  of  this  duty  is 
shown  in  a  Rhode  Island  case,  where  by  the  terms  of  the  trust 
the  trustee  was  required  to  pay  over  the  income  to  the  bene- 
ficiary "at  such  times  and  in  such  amounts  as  may  according  to 
the  judgment  and  discretion  of  the  trustee  seem  best."50  The 
court  said:  "The  bill  sets  out  no  claim  which  the  complainant 
has  upon  the  respondent,  unless  it  may  be  the  right  to  be  in- 
formed of  the  amount  and  particulars  of  the  investment  of  the 
fund.  *  *  *  The  discretion  of  the  trustee  is  not  entirely  an 
arbitrary  one,  but  if  abused  would  be  corrected  by  a  court  of 
equity.  Hence  we  think  the  bill  may  be  supported  as  asking 
for  such  an  account."  All  of  which  is  equivalent  to  saying, 
that  when  the  complainant  applied  for  this  information  it 
should  have  been  given,  because  the  settlor  did  not  specifically 
say  it  need  not  be  given. 

There  arises,  also,  out  of  the  fact  that  the  legal  title  is  vested 
in  the  trustee  the  right  in  the  cestui  to  require  verification  of  in- 
formation by  the  trustee  purporting  to  be  sufficient,  a  principle 

BOBarbour  v.  Cummings  (1904),  26  R.  I.  201,  58  Atl.  660. 

223 


§   141.]  INFORMATION   FROM  TRUSTEES.  [CHAP.   XVII. 

illustrated  by  an  English  case.51     This  case  was  brought   by 
one  of  several   cestuis  in  a  testamentary  trust  to   compel  the 
trustee  under  a  will  to  give  information  as  to  the  amount  of 
consols  standing  in  his  name  and  what  stop  orders  and  distrin- 
gases  (if  any)  had  been  placed  thereon  and  to  produce  all  deeds, 
papers  and  documents   in    his    possession    relating   to    property 
held  by  him  as  trustee  and  to  furnish  plaintiff  with  a  generaj 
account  of  the  estate.     The  court  first  granted  an  order  that 
the  trustee  should  write  a  letter  to  the  Bank  of  England  to 
inform  the  plaintiff  as  to  the  amount  of  consols,  and  plaintiff 
afterwards  asked  for  the  order  to  be  amended  so  that  informa- 
tion as  to  stop  orders  and  distringases  might  be  obtained.     The 
court  said:  "The  general  rule  is  that  the  trustee  must  give  in- 
formation to  his  cestui  que  trust  as  to  the  investment  of  the 
trust  estate.     Where  a  portion  of  a  trust  estate  is  invested  in 
consols,  it  is  not  sufficient  for  the  trustee  merely  to  say  that  it 
is  so  invested,  but  his  cestui  que  trust  is  entitled  to  an  authority 
from  the  trustee  to  enable  him  to  make  proper  application  to 
the  bank  in  order  that  he  may  verify  the  trustee's  own  state- 
ment; there  may  be  stock  standing  in  the  name  of  a  person  who 
admits  he  is  a  trustee  of  it,  which  is  at  the  same  time  incum- 
bered."    There  was  no  charge  in  this  case  of  the  trustee  having 
been  guilty  of  any  wrong,  but  there  was  a  suggestion  that,  inas- 
much as  the  plaintiff  owned  only  one  of  twelve  shares  in  the 
trust,  he  might  be  getting  more  information  than  he  was  en- 
titled to.     It  was  thought  this  should  not  prevent  the  order  be- 
ing made.    This  seems  a  very  pertinent  case,  the  question  being 
strictly  confined  to  the  trustee  giving  information,  suit  being  by 
one  cestui  and  no  other  relief  being  asked. 

The  right  of  inspection  by  the  cestui  que  trust  goes  even  to 
the  production  of  opinions  of  counsel  procured  to  guide  the 
trustee  in  the  administration  of  his  trust.  Thus,  Sir  John  Rom- 
illy,  M.  R.,  said :  "There  can  be  no  question  that  the  rule  is,  that 
where  the  relation  of  trustee  and  cestui  que  trust  is  established, 
all  cases  submitted  and  opinions  taken  by  the  trustee  to  guide 

5lln   re.  Tillott,  Lee  v.  Wilson   (1892),   1   Ch.   86;  Ames'   Cases 
on  Trusts  468. 

224: 


CHAP.  XVII.]  INFORMATION  FROM  TRUSTEES.  [§   141. 

himself  in  the  administration  of  the  trust  and  not  for  his  own 
defense  in  any  litigation  against  himself,  must  be  produced  to 
the  cestui  que  trust.  They  are  taken  for  the  purpose  of  admin- 
istration of  the  trust,  and  for  the  benefit  of  the  persons  entitled 
to  the  trust  estate,  who  will  have  to  pay  the  expense  thereby 
incurred."  52 

This  theory  in  English  cases  of  no  other  person  having  any 
property  interest  in  a  trust  estate  than  its  beneficiaries  and  that 
they  are  not  like  wards  in  chancery  whose  advice  may  not  be 
expected  in  regard  to  its  management,  or  that  they  may  not  ask 
for  other  trustees  where  they  may  think  that  management  is 
detrimental  to  the  trust,  has  support  in  a  great  abundance  of 
English  decision,  and  there  are  also  American  cases  along  the 
same  line,  as  see  Barbour  v.  Cummings,  supra. 

In  a  California  case  it  was  said  that  fraud  need  not  be  alleged 
by,  nor  that  any  amount  is  due  to,  a  cestui  que  trust  to  entitle 
him  to  an  accounting.  "The  very  object  of  an  accounting  may 
be,  and  frequently  is,  to  ascertain  how  much  has  been  realized 
and  expended,  so  as  to  determine  whether  the  cestui  que  trust 
is  entitled  to  payment."53 

A  very  much  more  recent  decision  by  this  court  shows  that  a 
trustee  upon  inquiry  before  suit  was  begun  refused  information 
to  his  cestui  que  trust  and  the  court  said:  "This  was  not  a 
compliance  with  his  obligation  which  was  to  give  to  his  bene- 
ficiary complete  and  satisfactory  information  of  his  dealings 
with  the  trust  estate."54 

In  Michigan  it  was  said :  "The  beneficiaries  under  a  trust  have 
the  right  to  be  kept  informed  at  all  times  concerning  the  man- 
agement, and  it  is  the  duty  of  the  trustees  to  so  inform  them. 
It  is  not  generally  presumable  that  the  beneficiaries  have  such 
information  from  independent  sources."55  After  announcing 

52Wynne  v.  Humberston  (1858),  27  Beav.  421. 

SSGreen  v.  Brooks  (1889),  81  Cal.  328. 

54Bone  v.  Hays  (1908),  154  Cal.  759,  766,  99  Pac.  172. 

55Loud  v.  Winchester  (1883),  52  Mich.  174,  183,  17  N.  W.  784. 

225 


§    141.]  INFORMATION   FROM  TRUSTEES.  [CHAP.   XVII. 

this  principle  Judge  Campbell  further  said:  "When,  therefore, 
a  bill  is  filed  to  call  trustees  to  an  account,  any  testimony  throw- 
ing light  on  their  management  bears  directly  on  the  perform- 
ance of  this  duty,  and  may  be  considered  in  taking  the  accounts 
and  in  determining  the  view  to  be  taken  of  the  conduct  of  the 
trustees."  In  other  words,  if  a  trustee  has  not  at  all  times  kept 
the  cestuis  informed,  presumptively  he  is  at  fault  and  the  bur- 
den is  on  him  to  excuse  himself,  and,  not  doing  so,  this  is  for 
consideration  in  regard  to  his  other  acts,  and  opens  the  door 
for  proof  of  misconduct  and  misappropriation,  whether  charged 
in  the  bill  or  not. 

When  this  case  again  came  before  the  Michigan  Supreme 
Court  Campbell,  then  Chief  Justice,  reiterated  what  is  last 
quoted  above.56  The  case  considered  was  where  a  trust  was 
embarked  in  business. 

This  same  court  composed  partly  of  the  same  bench  after- 
wards animadverted  upon  the  refusal  of  a  trustee  to  give  infor- 
mation to  a  cestui  que  trust  who  was  "obliged  to  make  resort 
to  the  proper  courts  to  compel  disclosure  of  facts  which  common 
honesty  should  have  induced  the  trustee  to  make  voluntarily 
and  with  pleasure."57 

In  North  Carolina  it  was  said  that:  "It  was  one  of  the  prin- 
cipal and  most  important  duties  of  a  trustee  that  he  should  keep 
regular  and  accurate  accounts  and  that  he  should  be  always 
ready  to  produce  those  accounts  to  his  cestui  que  trust."58 

In  Ohio  failure  by  the  trustee  to  consult  his  cestui  que  trust 
was  instanced,  among  other  things,  as  showing  that  his  man- 
agement of  the  trust  estate  was  arbitrary  and  unreasonable.59 

In  the  District  of  Columbia  Court  of  Appeals  it  was  said 
of  a  trustee  that :  "It  was  his  duty  to  keep  regular  and  accurate 
56Loud  v.  Winchester  (1886),  64  Mich.  23,  30  N.  W.  896. 
57perrin  v.  Lepper  (1888),  72  Mich.  454,  40  N.  W.  859. 
58Walker  v.  Sharpe  (1874),  71  N.  C.  257. 

59Moeller  v.  Poland  (1909),  80  Oh.  St.  418,  441,  89  N.  E.  100. 
226 


CHAP,  xvii.]  TRUSTEE'S  REPORTS.  [§  142. 

accounts  of  his  trust,  and  to  be  ready  at  all  times  to  render 
them  whenever  called  for;  and  this  though  he  might  have  be- 
lieved that  on  a  fair  statement  of  accounts  he  could  owe 
nothing  to  his  principals  or  cestuis  que  trust"  otherwise,  "all 
presumptions  are  adversely  indulged  and  all  obscurities  and 
doubts  are  to  be  taken  most  strongly  against  him."60 

The  foregoing  cases  assume  that  the  right  of  fullest  dis- 
closure is  inherent  in  a  trust  relation  and,  therefore,  it  may  be 
fairly  urged  that  to  retain  it  is  the  retention  of  a  right  that 
vests  in  the  cestui  que  trust  just  as  his  interest  in  the  estate  is 
vested.  It  may  be  true  that  a  testator  or  other  settlor  could 
deny  or  qualify  that  right  or  a  settlor  in  his  own  interest  could 
waive  it,  but  where  this  is  not  done  it  remains  a  right  of  the 
same  nature  as  a  property  right,  and  if  a  settlor  or  a  number  of 
settlors  creating  a  trust  in  their  own  interests  waive  it  alto- 
gether, or  as  the  trustee  in  his  discretion  might  see  fit  to  make 
disclosures,  this  might  be  important  upon  an  inquiry  whether  or 
not  a  trust  in  equity  in  fact  had  been  created.  Easily  then,  it  may 
be  inferred,  that  statute  or  specific  provision  in  a  trust  instru- 
ment requiring  periodical  or  formal  reports  is  not  to  be  taken 
as  excluding  the  right  to  information  at  other  times  or  as  to 
special  matters,  but  that  such  statute  or  provision  is  cumulative 
of  such  right. 

§  142.  Reports  Required  by  Trust  Instrument. — Restraints 
on  Right  to  Information. — Questioning  Motive  of  Inquiry. — 
Because  of  the  number  of  shareholders  in  the  kind  of  trusts 
about  which  this  work  is  particularly  concerned,  and  for  the 
further  reason  that  their  residences  may  make  personal  inquiry 
inconvenient,  and  also  because  it  is  desirable  that  written  or 
printed  information  of  precisely  similar  tenor  should  be  given 
to  all  alike,  so  one  may  know  of  what  the  others  have  been  in- 
formed, it  will  be  seen  from  the  exhibits  which  are  found  at  the 
end  of  this  book  that  reports  are  required  of  trustees.  As  to 
what  is  to  be  embraced  in  these  reports,  so  as  to  present  the 
condition  of  the  estate  to  the  shareholders  in  an  intelligible  way 

60Richardson  v.  Van  Auken  (1895),  5  App.  D.  C.  209,  215. 

227 


§    142.    ]  RESTRAINTS    ON    EXAMINATION.  [CHAP.    XVII. 

and  what  should  be  done  in  the  way  of  verifying  their  correct- 
ness or  obtaining  supplementary  information,  if  desired,  is  a 
matter  best  for  consideration  in  the  formation  of  a  particular 
trust.  An  audit  by  chartered  or  certified  public  accountants  is 
sometimes  provided  for. 

These  reports  and  their  form  and  contents  are  matters  of 
detail  in  management,  non-observance  of  which  by  trustees  would 
be  evidence  more  or  less  strong  of  the  want  of  good  faith  and 
diligence  on  their  part.  Certainly  their  suggestions  of  falsity 
or  suppressions  of  fact  would  create  strong  presumptions  of 
fraud  and  misconduct,  and  even  were  such  reports  fair  upon 
their  face  any  objection  by  trustees  to  free  inquiry  as  to  their 
details  or  any  want  of  fullness  in  them,  so  far  as  the  common 
interests  of  the  shareholders  were  concerned,  prima  facie  would 
be  wrongful.  Discretion  by  trustees  in  management  may  be 
of  the  amplest  nature,  but  the  more  ample  that  is,  correspond- 
ingly it  is  expected  that  the  more  freely  may  inquiry  extend  to 
every  subject  to  which  that  discretion  applies. 

Another  use  these  formal  reports  subserve  is,  that  they  may 
be  guides  for  shareholders  in  making  such  inquiry  or  investi- 
gation as  shareholders  may  desire,  and  their  summaries  of 
affairs  may  be  preferred  to  synopses  of  books  and  accounts, 
which,  though  exact,  might  yet  present  a  very  incomplete  re- 
port of  the  condition  of  a  trust  estate. 

Therefore,  it  may  be  said,  that  ,these  reports,  instead  of 
being  regarded  as  militating  against  the  right  of  free  inquiry 
and  disclosure,  are  aids  to  its  better  exercise.  The  right  to  an 
accounting,  upon  a  proper  showing,  with  the  power  to  question 
the  trustee  generally,  and  thereby  secure  that  accidental  evi- 
dence which  discloses  truth  in  unexpected  places,  will  supple- 
ment, when  necessary,  the  formal  evidence  of  prepared  books 
or  papers. 

It  is  conceivable,  that  in  a  trust,  where  the  shareholders  be- 
cause of  the  absence  of  partnership  liability,  are  merely  invest- 
ors, as  are  stockholders  in  a  corporation,  especially  as  shares 
228 


CHAP.    XVII.]  MOTIVE   OF    EXAMINATION.  [§    142. 

are  transferred  with  the  same  facility  as  stock  in  a  corporation, 
the  personal  relation  of  trustee  and  cestui  que  trust  is  greatly 
eliminated.  It  may  be  thought,  therefore,  that  for  the  protec- 
tion of  the  trust  property  or  of  the  individual  interests  of  share- 
holders, but  not  for  other  reasons,  independent  individual  in- 
quiry could  be  restricted.  It  is  clear,  that  the  position  of  a 
shareholder  ought  to  extend  to  nothing  except  what  pertains 
to  his  own  and  the  common  interests,  and,  if  inquiry  at  all  times 
without  restriction  may  open  the  door  to  abuse  and  probable 
detriment  to  the  business  of  a  trust  estate,  it  is  in  the  line  of 
protecting  the  estate,  if  reasonable  discretion  is  given  the  trus- 
tees in  this  regard.  It  is  wholly  antagonistic,  however,  to  the 
trust  relation  that  any  discrimination  should  be  shown  between 
cestuis  as  to  their  right  of  inquiry,  or  that  trustees  should  not 
be  obligated  to  full  and  free  disclosure  upon  any  proper  occa- 
sion. 

In  the  New  York  Court  of  Appeals  this  question  was  touched 
upon  in  an  action  to  compel  the  transfer  of  shares  in  a  trust 
purchased  in  the  open  market,  resistance  being  made  upon  the 
ground  that  the  purchase  was  not  bona  fide,  but  to  further  the 
active  opposition  of  the  purchaser  as  a  competitor  of  the  trust, 
and  that  by  ownership  he  would  be  enabled  "to  vex  and  harrass" 
the  trust.  In  other  words,  the  objection  was  personal  to  the 
purchaser.61  The  court,  after  saying  that  discretionary  power 
must  be  reserved  in  the  trust  instrument  otherwise  discrimina- 
tion cannot  be  made  between  bona  fide  purchasers  of  shares  in 
the  open  market,  thought  it  did  not  sufficiently  appear  that  the 
relief  asked  "may  result  oppressively  or  to  the  undue  prejudice 
of  the"  trust. 

The  relief  asked  was  resisted  merely  upon  the  ground  of 
motive  of  the  purchaser  in  purchasing,  a  different  thing  than 
where  as  a  shareholder  he  would  apply  for  inspection  of  books. 
The  court  dwells  upon  the  fact  that  "the  shares  of  the  trust 
were  unqualifiedly  transferable"  in  the  open  market.  Upon  the 
eiRice  v.  Rockefeller  (1892),  134  N.  Y.  174,  31  N.  E.  909,  17  L. 
R.  A.  237. 

229 


§   143.]  SHARES  AS  COLLATERAL.  [CHAP.   XVII. 

whole,  this  case  supports  the  view  that  discrimination  shall  not 
be  shown  between  bona  fide  shareholders  in  any  respect  and  it 
is  not  opposed  to  inspection  being  kept  free  of  abuse,  however, 
this  may  be  as  to  the  right  to  interfere  with  any  purchaser, 
whatever  his  motive,  in  purchasing  shares  in  the  open  market. 
The  case  concedes,  also,  that,  had  the  power  been  reserved  to 
discriminate  as  to  purchasers,  this  would  be  valid.  A  fortiori 
would  it  be  true  that  a  reserved  power  to  inquire  into  motives 
of  inspection  would  be  valid. 

§  143.  Using  Shares  as  Collateral  Security. — Taking  it  that 
shares  represented  by  certificates  are  vendible,  it  follows  that 
they  may  be  used  as  collateral  security  for  a  loan  or  debt.  In- 
terests in  a  trust,  even  when  not  represented  by  issued  shares, 
that  is  to  say  by  a  certain  agreed  form  of  certificate,  as  conclu- 
sive evidence  of  ownership  of  a  share  or  shares,  have  long  been 
used  for  the  purpose  of  borrowing  money.62  In  this  country 
too  it  was  held  that  a  share  represented  by  a  certificate  in  a 
syndicate,  of  which  the  members  were  partners,  could  be  ac- 
cepted as  security  by  a  national  bank,63  but  thereby  such  a 
bank  could  not  be  made  a  partner  in  the  syndicate,  such  being 
beyond  the  power  of  the  bank,  and  even  that  qualification  was 
dissented  from  by  a  strong  minority  of  the  court.  But  this 
work  has  proceeded  wholly  upon  the  theory,  that  there  is  no 
partnership  relation  in  a  voluntary  association,  under  an  agree- 
ment of  trust,  where  the  entire  control  of  the  business  is  in 
the  holder,  as  trustee,  of  the  legal  title,  especially  where  the 
trust  instrument  declares,  that  there  is  no  personal  liability  and 
that  all  persons  dealing  with  the  trustee  shall  be  notified,  that 
the  trust  property  alone  shall  be  liable  for  the  contracts  of  its 
trustee. 

Indeed  it  may  be  said,  that  a  lender  may,  with  less  fear  of 
being  involved  in  the  affairs  of  the  borrower,  accept  certificates 

62Low   v.   Bouverie   (1891),  3   Ch.   82;   In  re.   Dartnell  (1895),   1 
Ch.  474;  In  re.  Skinner  (1904),  1  Ch.  289. 

1  63Merchants'    National    Bank    v.    Wehrmann    (1906),    202    U.    S. 
295,  26  Sup.   Ct.  Rep.  613,  50  L.   Ed.   1036. 
230 


CHAP.  XVII.]  SHARES  AS  COLLATERAL.  [§   143. 

of  shares  in  a  trust  estate,  than,  where,  under  some  circum- 
stances, he  might  be  compromised  in  accepting  corporate  shares 
as  collateral.  Thus  where  a  national  bank  accepted  as  collateral 
on  a.  loan  to  its  customer  shares  in  another  national  bank  and 
upon  the  note  falling  due  and  remaining  unpaid  caused  the 
shares  to  be  transferred  to  it,  in  the  name  of  a  nominal  holder, 
it  became  subject  to  the  liabilities  of  a  stockholder  of  the  bank 
whose  shares  were  thus  transferred,  that  bank  having  become 
insolvent.64  And  it  would  seem  that  about  the  only  reason  why 
a  similar  ruling  was  not  made  against  another  national  bank, 
where,  having  a  claim  against  a  Minnesota  corporation,  it  with 
other  creditors  re-organized  it  and  took  stock  for  their  debts. 
This  was  held  a  taking  of  stock  in  a  speculative  venture,  which 
was  not  within  the  power  of  a  national  bank  to  do,65  Justices 
Brewer  and  Brown  dissenting.  It  seems  plain,  however,  that 
if  the  bank  had  taken  stock  in  an  already  organized  corporation, 
as  Justice  Brewer  argues,  it  would  have  been  subjected  to  the 
double  liability  of  the  Minnesota  statute.  The  Wehrmann  case, 
supra,  decides  that  not  even  does  lending  on  a  share  in  a  part- 
nership and  the  bank  afterwards  becoming  owner  subject  it  to 
liability,  but  this  is  "simply  a  transfer  of  a  right  to  have  the 
property  accounted  for  and  receive  a  share  of  any  balance  left 
after  paying  the  debts." 

It  appears  from  decisions  submitted,  that  there  is  no  per- 
sonal liability  of  cestuis  que  trust;  that  third  persons  are  dealt 
with  solely  upon  express  notice  that  the  trust  property  alone 
is  to  be  looked  to,  and,  further,  that  all  contracts  of  trustees, 
unless  trust  property  is  solely  made  liable,  are  their  personal 
contracts.  It  seems,  therefore,  impossible  for  any  lender  upon 
shares  of  a  trust  estate  to  become  involved  in  any  such  way  as 
might  happen  in  lending  to  stockholders  in  a  corporation,  but 
the  value  or  estimated  value  of  shares  in  a  trust,  offered  as 
security,  needs  alone  to  be  considered. 

64National  Bank  v.  Case   (1878),  99  U.  S.  628;  California  Nat'l. 
Bank  v.  Kenedy  (1897),  167  U.  S.  362. 

65First  National  Bank  v.  Converse  (1906),  200  U.  S.  425. 

231 


§    144.]  MEETINGS   OF   CESTU1S.  [CHAP.    XVII. 

§  144.  Meetings  of  Certificate  Holders. — Receipts,  Acquit- 
tances and  Waivers. — As  stated  by  Lord  Colton,  in  Smith  v. 
Anderson,66  the  shareholders  at  annual  meetings,  meet  as  ces- 
tuis.  Hence  it  is  assumed  their  deliberations  or  acts  at  such 
meetings  will  neither  in  fact  nor  appearance  be  those  of 
principals.  "They  meet  to  receive  reports,  appoint  auditors  and 
elect  new  trustees."  The  outline  of  the  record  of  such  a  meet- 
ing is  set  forth  as  an  exhibit  in  the  back  of  this  book.  As  a 
part  of  such  meetings,  the  minutes  may  recite  the  approval  or 
non-approval  of  the  past  operations  of  the  trustees  and  waivers 
of  their  rights,  so  far  as  disclosed,  but  as  ruled  in  a  great  federal 
case,67  receipts  and  acquittances  do  not  affect  cestuis'  rights, 
where  "they  were  obviously  given  without  full  knowledge  of 
all  the  circumstances  connected  with  the  disposal  and  manage- 
ment of  the  estate." 


66(1880),  15   Ch.  Div.  247. 
67Michoud  v.  Girod  (1846),  4  How.  503,  561. 
232 


CHAPTER  XVIII. 
INVIOLABILITY  OF  TRUST  FUND. 

§  145.  Preliminary. — It  has  been  shown  in  preceding  chap- 
ters that  the  obligations  of  trustees  of  active  trusts  are  personal, 
but  this  does  not  mean  that  creditors  or  cestuis  que  trust  ex- 
haust their  remedies  in  attempts  to  collect  from  the  trustees. 
This  personal  liability,  instead  of  detracting  in  any  way  from 
the  creditors'  security,  enlarges  it,  leaving  unimpaired  the  prin- 
ciple that  property  impressed  with  a  trust  may  be  followed  by 
whomsoever  is  interested  in  the  enforcement  of  the  trust.  The 
many  cases  hereinbefore  cited  and  discussed,  show  that  both  in 
England  and  America  the  trust  estate  is  reached  by  creditors 
through  the  trustees'  right  of  indemnity  and  it  is  scarcely  dis- 
putable but  that  a  creditor,  who  may  subject  a  trust  estate  to 
his  debt  at  all,  has  a  claim  superior  to  that  of  the  cestuis  que 
trust.1 

§  146.  Pursuit  by  Creditor  of  Trust  Fund. — That  a  trust 
fund  may  be  pursued  and  rescued  from  any  hands  into  which 
it  has  come  with  notice  of  its  character,  the  numberless  cases 
in  which  cestuis  have  followed  and  rescued  it  attest.  The  prin- 
ciple rests  upon  wrongful  diversion  being  corrected — a  status 
quo  being  restored.  That  authority  in  cases  of  creditors  of  a 
trust  pursuing  what  has  been  diverted  are  not  so  numerous, 
proves  but  the  lack  of  incident  in  this  kind  of  litigation,  for,  at 
all  events,  what  is  a  superior  right  to  that  of  a  cestui  ought  to 
have  at  least  equality  in  remedy.  But  cases  are  not  entirely 
lacking  as  to  a  creditor's  remedy  against  wrongful  diversion  of 
trust  assets. 

The  principle  of  the  right  of  pursuit  was  impliedly  recognized 
by  Putnam,  C.  J.,  in  holding  that  stipulation  by  a  trustee  for 
IKufferman  v.  McGehee  (1879),  63  Ga.  250;  Rice  v.  Lane  (1896), 
166  Mass.  233,  44  N.  E.  133. 

233 


§    146.]  FOLLOWING    TRUST    FUND.  [CHAP.    XVIII. 

exemption  from  personal  liability  is  valid.2  The  learned  judge 
said:  "The  entire  property  of  the  association  was  held  in  trust 
and  therefore  subject  to  administration  by  the  chancery  courts, 
which  could  apply  it  equitably  and  proportionately  to  the  dis- 
charge of  obligations  incurred  by  the  trustee,  as  contemplated 
by  the  express  direction  of  the  article  of  association,  that  the 
creditors  of  the  trustees  should  look  for  payment  solely  to  its 
property." 

A  Pennsylvania  case  was  brought  for  the  express  purpose  of 
having  a  trust  estate  applied  in  the  very  way  Judge  Putman 
describes.  Thus  a  testamentary  trust  was  to  carry  on  the  busi- 
nesses of  testator.  Both  the  trust  estate  and  the  trustee  be- 
came insolvent.  The  trustee,  while  the  estate  was  so  insolvent, 
gave  to  certain  creditors  promissory  notes  with  warrants  of  at- 
torney to  confess  judgment,  and  upon  these  judgments  were 
entered  and  executions  issued.  He  also  made  an  assignment  of 
all  the  property  of  the  estate  in  trust  to  pay  its  creditors.3 

The  court  said :  "The  trust  estate  is  principally  liable  for  the 
debts  contracted  upon  the  faith  of  it.  As  it  is  insolvent,  and 
the  trustee,  as  the  master  finds,  is  also  insolvent,  he  became  a 
trustee  for  its  creditors.  As  such  he  was  bound  to  protect  all 
their  rights  and  preserve  the  trust  estate  for  distribution  among 
them  according  to  their  respective  rights  and  had  no  right  to 
give  a  preference  to  any  of  them.  The  estate  being  insolvent 
all  of  its  creditors  stood  upon  an  equality  and  a  creditor  who 
has  received  a  judgment  for  the  purpose  of  liquidating  his 
claim  has  no  right  to  enforce  said  judgment  by  execution  to 
the  destruction  of  the  estate  or  the  rights  of  other  creditors." 

It  was  urged  that  only  the  cestuis  que  trust  could  proceed  as 
the  creditors  were  proceeding  and  that  the  creditors'  only  rem- 
edy was  by  an  action  at  law.    The  court  said :  "It  is  claimed  that 
as  the  relation  between  the  creditors  and  the  trustee  is  a  con- 
tractual one,  the  trustee  had  a  right  to  give  mortgages  or  con- 
2Bank  of  Topeka  v.  Eaton  (1900),  100  Fed.  8. 
3Woddrop  v.  Wleed   (1893),  154  Pa.  307,  26  Atl.  375,  35  Am.  St. 
Rep.  832. 
234 


CHAP.    XVIII.]  CORPORATE   ASSETS.  [§    147. 

fess  judgments.  Where  the  estate,  however,  has  become  in- 
solvent and  the  rights  of  creditors  have  intervened  and  the  estate 
should  be  held  intact  for  distribution,  a  trustee  has  no  right  to 
confess  judgments  with  intent  to  prefer  creditors  by  giving 
them  the  right  to  issue  execution  and  sell  the  property." 

The  relief  sought  in  a  Massachusetts  case  against  a  trust 
estate  carrying  on  a  manufacturing  business  was  by  creditors 
to  have  their  claims  paid  in  full  out  of  the  trust  property,  or,  in 
case  it  was  insufficient  for  all  claims  to  be  paid,  in  pro  rata  dis- 
tribution. The  bill  was  held  maintainable  and  also  that  it  was 
unnecessary  that  claims  should  have  been  first  reduced  to  judg- 
ment.4 

There  was  no  contest  in  this  case  except  for  priority  among 
creditors,  and  this  solely  because  of  a  change  of  trustees.  All 
classification  of  debts  was  denied,  except  as  to  certain  special 
claims  which  were  expenses  of  administration  of  the  trust.  This 
case  cites  a  great  number  of  cases  which  are  referred  to  in  note.5 

These  cases  establish  the  proposition,  that  in  no  way  may  a 
trust  estate  be  gotten  beyond  the  purpose  for  which  it  was 
created.  Of  course,  debts  legitimately  incurred  may  be  secured 
by  a  lien  upon  trust  assets,  where  the  lien  is  created  in  the  fair 
operation  of  a  trust  estate  in  business,  as  a  going  concern,  for 
this  may  be  in  furtherance  of  the  purpose  of  the  trust,  but  there 
is  no  way  whereby  any  preference  may  be  given  to  any  creditor 
when  it  becomes  insolvent,  nor  may  its  assets  be  free  from 
pursuit  when  not  disposed  of  in  strict  execution  of  the  purposes 
of  the  trust,  nor  any  charges  otherwise  raised  against  a  trust 
or  its  income. 

§  147.  Corporate  Assets  as  a  Trust  Fund. — The  trust  fund 
theory  as  to  corporate  assets,  that  is  to  say,  that  corporate  prop- 

4Mason  v.  Pomeroy  (1890),  151  Mass.  164,  24  N.  E.  202,  7  L. 
R.  A.  771. 

5Ex  parte  Garland,  10  Vcs.  110;  Ex  parte  Richardson,  3  Madd. 
138;  Burwell  v.  Mandeville  2,  How.  560;  Smith  v.  Ayer,  101  U.  S. 
320;  Jones  v.  Walker,  103  U.  S.  444;  Pitkin  v.  Pitkin,  7  Conn.  307. 

235 


§    148.]  PREFERENCES  BY  CORPORATIONS.  [CHAP.    XVIII. 

erty  may  be  followed  by  creditors  into  the  hands  of  any  persons 
having  notice  of  a  corporation's  insolvency,  has  been  greatly 
discussed  in  this  country.  The  doctrine  had  its  origin  in  1824 
in  a  case  decided  by  Judge  Story,6  but  that  the  doctrine  has 
any  more  extended  application  than  that  a  corporation  must  pay 
its  debts  before  dividing  its  assets  among  its  stockholders  is 
greatly  to  be  doubted.7  This  is  similar  to  the  idea  in  regard  to 
a  partnership  whose  assets  go  in  preference  to  partnership  credi- 
tors rather  than  to  the  partners  or  their  individual  creditors. 
But  it  has  been  held  that  a  corporation  debtor  "does  not  hold 
its  property  in  trust  or  subject  to  a  lien  in  favor  of  its  creditors 
in  any  other  sense  than  does  an  individual  debtor."8  For  this 
reason  the  contention  that,  if  a  corporation  fails  to  pursue  its 
rights  against  third  persons,  whether  arising  out  of  fraud  or 
otherwise,  creditors  could  compel  it  to  do  so  as  being  a  breach 
of  trust  was  held  not  tenable.  Also  it  was  held  that  simple 
contract  creditors  could  not  reach  the  property  of  an  insolvent 
corporation,  in  equity,  but  must  first  reduce  their  claims  to 
judgment.  The  court  further  said:  "A  party  may  deal  with  a 
corporation  in  respect  to  its  property  in  the  same  manner  as 
with  an  individual  owner  and  with  no  greater  danger  of  being 
held  to  have  received  into  his  possession  property  burdened  with 
a  trust  or  lien."  Of  course,  one  dealing  with  a  trustee,  if  he 
wishes  other  security  than  his  personal  liability,  must  look  to 
his  authority.  If  he  procures  from  him  property  burdened  with 
a  trust,  it  may  be  followed,  and,  if  a  creditor  is  thus  adversely 
affected,  a  court  of  equity  does  not  stop  to  inquire,  if  a  judg- 
ment has  been  first  obtained  against  the  trustee. 

§  148.  Assignments  and  Preferences  by  Corporations. — Cor- 
porations unless  specially  excepted  have  the  same  right  to  assign 
for  the  benefit  of  creditors  as  has  an  individual  or  partnership,9 

®Wood  v.  Dummer  (1824),  3  Mason  308. 

7Fogg  v.   Blair   (1890),   133  U.   S.   534,  541,   10  Sup.   Ct.   Rep.  338, 
33   L.  Ed.  721. 

SHollins   v.    Brierfield   Coal   Co.    (1893),    150   U.    S.   371,    14   Sup. 
Ct.  Rep.  127,  37  L.  Ed.  1113. 

9  4  Cyc.  132  and  authorities  cited. 
236 


CHAP.    XVIII.]  UNPAID    SUBSCRIPTIONS.  [§     150. 

and  also  to  prefer  particular  creditors,10  but  we  have  seen  that 
such  is  not  the  case  as  to  a  trust.11 

§  149.  Trust  Estates  Not  Subject  to  Bankruptcy. — A  trust  is 
scarcely  conceivable  as  a  person.  It  is  merely  an  estate  without 
any  capacity  contractual  or  otherwise.  As  said  by  Justice 
Wood:12  "When  a  trustee  contracts  as  such,  unless  he  is 
bound,  no  one  is  bound  for  he  has  no  principal.  The  trust  estate 
cannot  promise,  the  contract  is  therefore  the  personal  undertak- 
ing of  the  trustee."  He  further  shows  that  a  trustee  may  so 
contract  that  the  other  party  is  to  look  solely  to  the  trust 
estate,  but  the  contracting  must  be  by  the  trustee  who  merely 
places  a  charge  on  property.  Therefore  a  trust  estate  has,  in 
a  strict  sense,  no  debts,  but  may  be  bound  only  for  debts  law- 
fully created  by  a  proper  person. 

The  United  States  bankruptcy  statute13  says:  "Any  person, 
except  a  municipal,  railroad,  insurance  or  banking  corporation" 
may  become  a  bankrupt.  Thus  by  naming  subjects  trust  estates 
are  excluded.  Indeed  it  would  be  somewhat  difficult  to  see  how 
the  provisions  of  the  bankruptcy  statute  could  be  applied  to  a 
trust  estate,  if  it  has  no  contractual  capacity.  It  cannot  create 
a  debt  and  it  can  give  no  preference,  and  a  court  of  equity,  as 
seen,14  does  not  permit  the  trustee  to  create  preferences,  but 
will  apply  the  entire  estate  equitably  and  proportionately  ac- 
cording to  principles  of  equity  jurisprudence. 

§  150.  Unpaid  Subscriptions  to  Shares  in  a  Trust  Estate. — 
To  speak  of  unpaid  subscriptions  to  shares  in  a  trust  estate  lacks 
much  of  precision  in  language.  To  explain  that  it  means  the 
amount  or  balance  contracted  to  be  paid  for  an  interest  in  a 
trust  estate  has  something  more  of  definiteness  about  it.  But 

10  4  Cyc.   166  and  authorities  cited. 
HWoddrop  v.  Weed,  §  146,  supra. 
12Taylor  v.  Davis  (1883),  110  U.  S.  330,  335. 

13Act   of  July  1,   1898,  as  amended   in   1903,   1906   and    1910,   36 
Stat.  et  L.  838. 

l*Woddrop  v.  Weed,  supra. 

237 


§     150.]  UNPAID    SUBSCRIPTIONS.  [CHAP.     XVIII. 

even  this  suggests  a  transaction  out  of  the  ordinary  in  regard 
to  trust  estates.  The  legal  characteristic  of  a  trust  is  that  it  is 
a  corpus  in  the  custody  of  a  trustee,  who  holds  the  legal  title 
with  the  beneficial  estate  in  others,  who  are  denominated  cestuis 
que  trust,  where,  as  in  such  trusts,  as  this  work  especially  con- 
siders, the  settlors  are  the  sole  cestuis,  they  contract  with  each 
other  how  severally  they  may  acquire  that  status.  If,  for  ex- 
ample, it  were  determined  that  there  should  exist  one  thousand 
interests  in  a  trust  estate  about  to  be  created,  it  could  be  agreed 
by  settlors  inter  sese,  that  it  should  be  in  money  or  stocks  of 
corporations,  bonds,  mortgages,  negotiable  paper,  land  or  any 
other  property,  or  in  part  of  one  and  part  of  others  of  these 
things.  It  competently  could  be  determined  that  money  must  be 
paid  by  each  settlor  for  an  interest  in  that  estate  or  that  he  should 
surrender  to  it  a  certain  equivalent  of  money.  No  one  has  a  right 
to  object,  if  the  settlors  themselves  are  satisfied.  But  under  such 
arrangement  there  would  be  no  such  thing  as  unpaid  subscrip- 
tion to  a  trust  fund.  As  to  his  interest  in  the  trust  fund  he 
would  be  a  cestui,  as  to  his  liability  to  pay  for  it  he  would  be 
a  debtor,  two  very  different  and  distinct  things  as  clearly 
demonstrated  in  Ames  Cases  on  Trusts.  If  the  equivalent  of 
money,  for  example,  were  the  promissory  note  of  a  settlor,  he 
would  own  an  interest  in  the  trust  fund  and  be  liable  upon  his 
note.  If  non-payment  of  the  note  worked  a  forfeiture  of  the 
interest,  the  transaction  would  be  as  if  it  had  never  been  entered 
into.  In  either  event  it  would  be  inaccurate  to  say  there  was 
liability  upon  a  subscriber.  This  would  appear  clear  if  the  set- 
tlor paid  for  his  interest  with  the  note  of  a  third  person,  whether 
the  condition  of  forfeiture  attached  or  not.  The  subscriber 
would  owe  nothing,  though  the  maker  of  the  note  does. 

But  there  would  be  something  more  of  semblance  to  an  un- 
paid subscription,  if  settlors,  not  desiring  that  the  entire  fund 
should  be  exacted  in  limine,  should  provide  in  a  trust  instru- 
ment that  instalment  payments,  or  further  payments  as  called 
for,  should  be  made  by  the  settlors.  It  would  seem  clear,  that, 
if  the  respective  interests  became  their  immediate  property, 
they  would  owe  upon  promises  supported  by  valuable  consid- 
238 


CHAP.  XVIII.]  UNPAID  SUBSCRIPTIONS.  [§   151. 

erations,  just  as  certainly  as  one  agreeing  similarly  to  pay  for 
a  definite  interest  in  land  or  a  chattel.  If  the  vesting  was  to 
be  postponed  or  subject  to  forfeiture,  until  payment  in  full  is 
made,  still  it  would  be  inaccurate,  or,  at  least,  not  compre- 
hensive, to  say  there  is  an  unpaid  subscription.  In  the  former 
situation  the  legal  status  is  more  accurately  defined  as  indebted- 
ness in  assumpsit;  in  the  latter  the  contract  according  to  its 
terms  might  be  either  an  option  by  the  proposed  settlor  to  re- 
linquish all  interest  in  the  trust  or  by  the  trustee  either  to  claim 
a  forfeiture  and  annul  what  has  been  done  or  sue  upon  the  set- 
tlor's promise  to  pay  the  instalments.  Thus,  in  whatever  way 
the  matter  is  viewed,  it  is  seen  that  it  is  merely  by  way  of  brevity 
in  expression  that  we  speak  of  unpaid  subscriptions,  so  far,  at 
least  as  acquiring  interests  in  a  trust  is  concerned. 

The  lack  of  complete  accuracy  in  the  expression  also  is  ap- 
parent when  we  come  to  consider  how  the  arrangement  of  sub- 
stitutes for  immediate  payment  in  money  is  provided  for  and  is 
to  be  completed.  Thus  the  settlors  require  that  the  trustee  shall 
take  legal  title  to  property,  some  of  which  is  choses  in  action'. 
Together  these  constitute  the  trust  fund.  The  trustee  is  in  no 
way  interested  in  how  the  settlors  acquire  interests  in  that  fund. 
The  law  of  contract  gives  them  their  several  interests  and  the 
trustee  is  responsible  to  them  severally  as  the  trust  instrument, 
presently  and  prospectively,  may  provide,  just  as  surely  as  in 
a  testamentary  trust  the  same  thing  may  be  determined. 

§  151.  Subscription  to  Corporate  Stock  Distinguished. — 
This  question  would  need  no  consideration  here  but  for  the 
circumstance  that  the  creation  of  a  trust  for  business  purposes 
suggests,  that  business  arrangements,  such  as  are  employed  in 
ordinary  business,  might  be  resorted  to  for  a  gradual  accumula- 
tion of  assets,  instead  of  establishing  a  completed  fund  at  the 
beginning,  and  the  evidencing  of  interests  by  transferable  cer- 
tificates makes  the  enterprise  take  on  what  resembles  a  cor- 
porate venture.  The  former  of  these  two  circumstances  would 
seem  to  have  been  sufficiently  considered  in  what  already  has 
been  said;  the  latter  needs  further  consideration,  because  it  is 

239 


§    151.]  UNPAID   SUBSCRIPTIONS.  [CHAP.    XVIII. 

desired  to  demonstrate,  that  decision  as  to  liability  of  stock- 
holders in  a  corporation,  extreme  or  lenient  as  that  may  be,  in 
no  way  is  applicable  to  the  holders  of  transferable  shares  in  a 
trust  estate. 

In  the  first  place,  the  writer  submits  that  it  has  been  abund- 
antly shown,  that  a  cestui  is  no  less  such  because  the  evidence 
of  his  interest  is  in  a  transferable  certificate,  and,  in  the  second 
place,  he  gets  his  interest  not  from  the  trustee  or  from  the  trust 
estate,  but  by  virtue  of  the  trust  instrument.  A  stockholder  in 
a  corporation  obtains  his  title  from  the  corporation  and  his 
obligation  to  it  is  or  may  be  affected  by  statute  attaching  certain 
consequences  to  his  dealing  with  the  corporation.  For  example, 
it  needs  no  authority  to  show,  that,  if  anyone  is  indebted  either 
to  a  trust  estate  or  to  a  corporation,  that  indebtedness  is  an  asset, 
which  in  case  of  insolvency  creditors  should  have  the  right  to 
subject  to  their  demands.  It  is  part  of  the  trust  fund,  so  de- 
nominated when  a  corporation  has  become  insolvent  and  so  of 
a  trust  estate,  whether  solvent  or  insolvent. 

But  confusion  has  arisen,  and  there  is  conflict  in  decision,  in 
corporation  cases  as  to  whether  or  not  there  is  an  obligation  by 
a  stockholder,  where  he  has  paid  a  corporation  less  than  par 
but  all  he  agreed  to  pay  for  a  share  of  stock,  because,  it  has  been 
contended,  the  law  requires  he  should  have  paid  no  less  than 
par  value  for  that  share.  Of  course,  if  that  contention  is  true 
there  is  an  indebtedness  which  is  a  trust  fund  for  an  insolvent 
corporation's  creditors.  This  theory  is  worked  out  variously, 
where  adhered  to  at  all,  as  two  very  interesting  articles  on 
what  may  be  called  the  trust  fund  theory  show.15  But  whether 
we  accept  the  ruling  followed  by  the  New  York  Court  of  Ap- 
peals in  a  very  recent  decision16  that  the  trust  fund  theory  has 
no  room  for  application  in  the  absence  of  positive  statute  that 

15X11  Yale  Law  Journal  (1902),  67;  XIII  Yale  Law  Journal 
(1903),  66. 

iSSouthworth  v.  Morgan  (1912),  N.  Y.,  98  N.  E.  490;  contra, 
McAllister  v.  American  Hospital  Ass'n.  (1912),  (Oregon)  125  Pac. 
£86. 

240 


CHAP.    XVIII.]  CONCLUSION.  [§     152. 

plainly  begets  a  duty  to  pay  full  par  value  to  a  corporation,  or 
with  the  opposite  view,  the  question  of  what  a  cestui  pays  for 
what  he  acquires  under  the  provisions  of  a  trust  instrument  is 
not  even  remotely  affected.  Therefore,  to  discuss  the  trust  fund 
theory  as  affecting  what  a  stockholder  may  or  not  owe  as  arising 
out  of  his  subscription  to  a  purchase  of  stock  in  a  corporation 
would  be  quite  foreign  to  the  purpose  of  this  book. 

It  may  be  further  said,  that  one  may  become  the  holder  of  an 
interest  in  a  trust  fund  by  dealing  with  a  trustee,  as  we  may 
see  is  provided  in  copies  of  trust  instruments  among  exhibits  at 
end  of  this  book,  but  this  arises  out  of  a  special  power  delegated 
to  the  trustee  and,  if  the  trustee  lets  in  a  new  cestui  and  covers 
whatever  he  pays  into  the  trust  fund,  he  increases  trust  assets, 
and,  if  he  pockets  what  is  paid,  there  is  nobody  hurt  but  the 
other  cestuis,  because  a  creditor  does  one  of  two  things — he 
credits  the  trustee  personally  or  he  relies  on  the  actual  and  not 
the  supposed  assets,  and  has  the  right  to  demand  of  the  trustee 
full  disclosure  of  their  amount  and  character.  Even  then  he 
relies  on  the  trustee  as  to  the  truth  of  his  disclosure.  There- 
fore whatever  may  be  thought  as  to  subscribing  for  corporate 
stock,  it  must  be  said  there  is  no  rule  or  statute  that  may  vary 
an  agreement  as  to  interests  in  a  trust  estate  from  intent  to 
create  a  specific  indebtedness  thereby,  which  would  constitute 
an  asset  of  a  trust  estate,  just  as  a  note  based  on  a  mortgage  in 
which  trust  funds  are  invested  is  such  an  asset.  Indeed  it  might 
be  provided,  that  the  purchaser  of  such  an  interest  could  only  be- 
come such,  where  he  does  not  pay  in  money  or  property,  by  giv- 
ing a  note,  and  it  would  be  but  business  prudence  to  thus  require. 
If  however,  partial  payment  is  required  and  a  condition  of  for- 
feiture annexed  to  non-completion  of  payments,  this  is  a  form 
of  security.  But  when  the  cestui  has  paid  all  he  has  agreed 
to  pay  that  would  end  his  liability. 

§  152.  Conclusion. — It  seems  to  the  author,  that  this  situ- 
ation of  a  trust  estate  is  more  attractive  to  creditors  or  proposed 
creditors,  than  is  possible  to  be  obtained  under  bankruptcy  and 
insolvency  statutes,  especially  the  latter,  because  of  their  vari- 

241 


§  152.]  CONCLUSION.  [CHAP.  xvm. 

ance  in  different  jurisdictions,  and  as  to  both  because  of  decision 
working  out  construction  in  new  developments.  Statutes  are 
compelled  to  be  arbitrary  in  certain  ways.  Their  want  of  flex- 
ibility often  works  injustice.  Equity  is  equality,  and  to  attain 
this  there  is  a  freer,  but  not  an  arbitrary,  will  in  courts  in  the 
settlement  of  equitable  estates.  Fraud  has  no  fixed  statute  of 
limitations  to  plead  against  its  exposure,  and  the  conscience  of 
a  trustee  may  be  more  thoroughly  probed  than  these  statutes 
afford  the  means  therefor.  To  preserve,  regain  and  distribute 
a  trust  estate,  in  accordance  with  the  purpose  of  a  trust,  calls 
for  the  application  of  principles,  which  are  universal  and  well- 
settled.  The  struggle  by  courts  to  bring  corporate  assets  to  the 
status  of  a  trust  fund  is  one  of  the  finest  tributes  to  the  excel- 
lence in  justice  of  the  theory  herein  expounded  that  one  might 
hope  to  find. 


242 


CHAPTER  XIX 
STIPULATIONS  IN  INSTRUMENTS  ESTABLISHING  TRUST  ESTATES 

IN  BUSINESS. 

Practical    Experience — General    Directions — Purposes — Name — 
Insurance — Temporary  Investments. 

§  153.  Practical  Experience  With  Trust  Estates  as  Business 
Companies. — It  is  perceived  from  cases  referred  to  and  dis- 
cussed in  foregoing  pages,  that  the  embarking  of  a  trust  estate 
in  business  has  been  accomplished  in  various  ways,  by  will,  by 
deed,  for  the  benefit  of  others  than  the  settlor  and  by  declara- 
tion of  trust  through  agreement  between  the  equitable  owners. 
A  trust  with  interests  represented  by  transferable  shares  has 
arisen  where  originated  by  will,  by  a  single  settlor  by  deed  and 
by  an  agreement  between  all  of  the  owners  of  original  certificates 
of  participation,  and  provision  has  been  made  for  acquisi- 
tion of  such  certificates  by  future  investors.  As  to  none  of 
these  forms  has  the  author  discovered  any  adjudication  or  prin- 
ciple denying  validity  of  the  trust  creation,  nor  any  suggestion 
of  provisions,  purporting  to  be  found  in  common-law  right, 
being  opposed  to  public  policy.  It  may  be,  that  some  local  statute 
may  be  thought  to  be  a  limitation,  more  or  less,  upon  the  prin- 
ciples endeavored  to  be  presented  in  this  volume,  but,  if  so,  its 
effect  will  not  be  here  touched  upon,  because  practitioners  in 
the  state,  where  it  may  be  found,  ought  to  be  more  competent 
to  consider  it  than  the  author.  The  method  in  the  formation  of 
a  trust  to  carry  on  business  in  which  this  volume  principally  is 
concerned  has  been  described  in  Massachusetts,  to  be :  "voluntary 
associations  organized  or  doing  business  under  written  instru- 
ments or  declarations  of  trust."1  An  interesting  treatment  of 
these  associations  is  found  in  the  report  of  the  tax  commissioner 
of  that  Commonwealth  upon  these  associations  made  in  January, 
1912,  to  the  Senate  and  House  of  Representatives  of  Massachu- 
iMass.  Acts  and  Resolves,  1911,  Ch.  55. 

243 


§   153.]  PRACTICAL   EXPERIENCE —  [CHAP.    XIX. 

setts  along  with  suggested  legislation.  He  deduces  that  Mas- 
sachusetts decision  holds  them  to  be  partnerships,  which  the 
author  submits  is  an  erroneous  conclusion,  where  certificate 
holders  are  exempt  from  liability  for  the  contracts  of  trustees, 
except  merely  for  the  purpose  of  taxation.2  The  question  of 
liability  of  certificate  holders  has  been  considered.3 

The  commissioner  shows  that  the  one  particularly  great 
growth  in  these  associations  was  in  what  is  known  in  Massa- 
chusetts as  "Real  Estate  Trusts"  caused  by  the  inability  of 
associates  to  organize  a  corporation  for  "buying  and  selling  real 
estate".  The  trust  form  of  organization  for  this  purpose,  there- 
fore, came  into  vogue,  and  it  was  so  attractive  to  Boston  in- 
vestors that  some  of  them  applied  it  in  other  states.4  How 
greatly,  however,  it  was  adopted  in  Boston  may  be  appreciated 
by  said  tax  commissioner  approving  a  statement  made  that: 
"The  real  estate  trusts  in  the  City  of  Boston  own,  it  is  esti- 
mated, property  valued  at  $250,000,000,"  which  "afford  oppor- 
tunity for  investment  in  real  estate  by  small  as  well  as  large 
investors,  and  permit  a  distribution  of  such  investments  among 
a  variety  of  properties,  thus  dividing  the  risk  of  loss  of  rent 
and  possible  shrinkage  of  values."  The  Commissioner  thought 
it  could  "not  be  denied  that  much  benefit  has  resulted  to  the 
City  of  Boston  and  other  places  in  the  improvement  of  real 
estate,  the  addition  of  property  to  the  tax  lists,  furnishing  ac- 
commodations for  increasing  business  and  the  general  promo- 
tion of  the  growth  and  prosperity  of  the  Commonwealth." 

The  Commissioner,  also,  shows  that  it  has  been  asserted,  as 
the  consensus  of  opinion  by  investors  in  these  trusts  that:  "The 
rights  of  shareholders,  the  terms  of  office  of  trustees,  their 
compensation,  powers,  duties,  and  limitations  are  more  satis- 
factorily regulated  by  the  terms  of  the  trust  agreement,  which 
can  be  drawn  to  meet  the  special  needs  in  each  case,  than  could 
be  possible  under  the  general  corporation  laws."  We  think  it 

2Wiilliams  v.  Boston  (1911),  208  Mass.  500,  94  N.  E.  808. 
SAnte,  Chapters  X  and  XI. 

4Mallory  v.  Russell   (1887),  71  Iowa  102,  60  Am.  Rep.  726. 
244 


CHAP,  xix.]  — "MASSACHUSETTS  TRUSTS''  [§  153. 

might  have  been  additionally  said  that  there  is  also  an  advan- 
tage in  these  agreements  containing  clauses  for  amendment  so 
as  to  make  them  conform  to  future  conditions. 

The  popularity  of  these  real  estate  trusts  most  probably  in- 
fluenced the  application  of  agreements  of  trusts,  with  interests 
represented  by  transferable  shares,  to  authorized  lines  of  cor- 
porate activity.  Therefore  "voluntary  unincorporated  associa- 
tions for  the  purpose  of  carrying  on  industrial  enterprises" 
were  formed  in  Massachusetts.  The  Commissioner  says  that: 
"In  the  course  of  this  investigation  not  more  than  a  dozen  of 
these  industrial  trusts  have  been  brought  to  my  (his)  attention," 
and  "most  if  not  all  of  them  have  been  reorganized  from  the 
corporate  form,  for  the  purpose  of  avoiding  publicity  of  the 
affairs  of  a  business  closely  held,  for  the  greater  flexibility  of 
management,  and  to  avoid  liability  for  the  federal  income  tax." 

As  in  this  chapter  we  are  endeavoring  to  present  the  prac- 
tical side  of  the  business  trust,  the  experience  of  those  who 
have  employed  the  trust  method  in  business  should  be  noted. 
The  Commissioner  says:  "The  advantages  which  it  is  claimed 
accrue  to  the  industrial  and  real  estate  trusts  have  principally 
to  do  with  the  greater  freedom  of  managing  the  affairs  of  the 
trust.  They  may  be  stated  generally  as  follows:  1.  These 
associations  have  been  found  by  the  experience  of  twenty-five 
years  to  be  a  convenient,  safe  and  unobjectionable  method  of 
co-operative  ownership  and  management.  They  are  for  the 
interest  alike  of  the  investor  and  the  public.  2.  The  form  of 
organization  ensures  a  continuity  of  management  and  control 
which  appeals  strongly  to  investors  in  real  estate  which  cannot 
be  secured  by  a  corporation  with  changing  officers.  The  trustees 
who  are  the  managing  officers  of  a  trust  are  not  so  likely  to  be 
changed  as  are  the  officers  of  a  corporation.  3.  It  affords 
a  more  economical  and  more  convenient  and  flexible  form  of 
management  than  does  a  corporation.  Trustees  can  transact 
business  with  more  ease  and  rapidity  than  directors." 

The  Commissioner,  speaking  practically  of  what  has  appeared 

245 


§    153.]  PRACTICAL  EXPERIENCE —  [CHAP.    XIX. 

in  Massachusetts,  argues  that  though  what  is  tlaimed  may 
be  true,  yet  experience  has  been  confined  to  cases  where  mem- 
bership has  been  limited,  and  there  has  been  something  like  a 
close  corporation,  but  he  is  dubious  of  equal  success  for  "those 
associations  which  seek  capital  in  the  open  market."  He  sug- 
gests that  a  stockholder  in  a  corporation  may  be  in  a  better 
situation  than  a  certificate  holder  in  a  trust,  because  by  statute 
the  former  may  examine  books  and  records,  and  annual  state- 
ments are  required.  He  does  not  explain,  however,  why  a 
trust  agreement  may  not  provide  for  the  same  thing  and  why 
a  certificate  holder  may  not  compel  what  is  provided  for.  In- 
deed, it  is  to  be  said  that  such  a  statute  is  but  declaratory  of  the 
common  law.  He  suggests  that  "the  same  publicity  should  be 
required  of  voluntary  associations  whose  membership  exceeds  a 
certain  number,  as  is  required  of  the  affairs  of  a  business  cor- 
poration." 

A  third  class  of  voluntary  associations  under  trust  agreement, 
the  Commissioner  calls  "Holding  Associations."  Of  these  the 
author  deems  it  not  particularly  important  to  speak.  By  doing 
so  he  would  be  led  into  discussion  about  combination  and  mon- 
opoly and  some  real  or  fancied  distinction  between  such  asso- 
ciations and  corporations  for  a  like  purpose.  This  kind  of  dis- 
cussion is  foreign  to  the  purpose  of  this  work.  At  least,  how- 
ever, it  may  be  said,  that  considering  this  and  the  other  pur- 
poses to  which  a  business  trust  has  been  applied,  its  adaptability 
may  be  thought  as  manifold  and  varied  as  legislation  may  au- 
thorize by  corporate  charters.  It  may  be  further  said,  that  the 
broad  principles  this  volume  has  been  endeavoring  to  present 
find  their  best  expression  in  the  consideration  of  an  English 
case  often  cited  hereinbefore,  where  it  was  contended  by  counsel 
and  denied  by  the  court,  that  a  holding  association  was  a  part- 
nership.5 

Outside  of  Massachusetts  these  voluntary  associations  organ- 
ized under  trust  agreement  have  not  greatly  appeared,  but 
such  as  have  appeared  in  judicial  decision  have  been  alluded  to. 

SSmith  v.  Anderson   (1880),  L.  R.   15   Ch.   D.  247. 
246 


CHAP,  xix.]  — "MASSACHUSETTS  TRUSTS.''  [§  154. 

§  154.  Summary  of  Situation  as  Shown  by  Experience, — 
The  report  of  the  Massachusetts  Commissioner  fails  altogether 
to  point  out,  that  any  serious  harm  has  come  to  any  one  from 
business  being  conducted  by  trustees  in  the  interest  of  owners 
represented  by  transferable  shares.  Rather  he  is  found  arguing, 
that  because  many  real  estate  trusts  say  "a  corporation  would 
have  answered  the  purpose  of  the  subscribers  quite  as  well  as 
a  trust,"  the  objection  to  corporations  for  this  purpose  should 
"not  now  be  considered  a  serious  bar"  to  their  formation,  and  he 
distinctly  declines  to  advise  that  these  trusts  should  be  pro- 
hibited, giving  as  his  opinion  that  this  "would  be  an  unwar- 
ranted interference  with  the  right  of  contract,  and  would  raise 
serious  constitutional  questions."  He  does  think  it  would  be 
wise  to  subject  them  to  further  regulation  by  the  state,  especially 
such  of  them  as  own,  hold  or  control  stocks  of  public  service 
corporations,"  alluding  here  to  "Holding  Associations." 

Therefore  it  may  be  confidently  said  that  the  business  trust 
is  not  an  experiment.  It  has  no  scandal  connected  with  its 
operation  and  it  is  -openly  asserted  that  "trustees  can  transact 
business  with  more  ease  and  rapidity  than  directors."  When 
we  add  to  this  practical  view,  derived  from  an  experience  of 
twenty-five  years,  that  a  business  trust  is  a  carrying  on  of  a 
business  as  a  right  and  not  as  a  privilege,  both  locally  ami 
abroad,  that  limitations  upon  the  power  of  its  managers  may 
be  as  strict  or  as  liberal  as  the  owners  of  that  business  desire 
and  that  these  limitations  may  be  enforced  according  to  the 
principles  of  equity  jurisprudence,  its  superiority  over  corporate 
formation  for  legitimate  business  would  seem  evident.  Frau:l 
may  lurk  in  the  formation  of  business  trusts,  as  it  lurks  in  the 
formation  of  corporations,  but  equity  has  fully  as  much  power 
to  drag  it  out  of  hiding,  as  statute  grants,  and  more  to  make  it 
restore  its  unconscionable  gains. 

It  was  not  in  the  province  of  the  Commissioner  to  consider 
the  general  constitutional  rights  of  a  business  trust  as  compared 
to  those  of  a  statutory  coporation,  nor  the  expense  of  its  forma- 
tion, nor  its  right  to  do  business  at  home  or  abroad.  He  was 

247 


§    154.]          CORPORATIONS    AND   TRUSTS    COMPARED.          [CHAP.    XIX. 

asked  to  discover,  if  he  might,  that  the  Massachusetts  trusts 
were  a  detriment  to  the  State  or  its  inhabitants  and  he  found 
they  were  not.  This  report  has  been  dwelt  upon,  because  it 
keeps  us  out  of  the  realm  of  speculation  and  within  the  domain 
of  fact. 

An  article  on  "The  Government  and  the  Corporations"6  by 
Mr.  Francis  Lynde  Stetson  of  the  New  York  bar  speaks  of 
voluntary  associations  under  a  trust  agreement  and  personal 
liability  of  members  being  thereby  avoided  and  of  their  possess- 
ing "all  the  advantages  of  a  corporation  excepting  existence 
for  an  indefinite  period,  which,  however,  is  impossible  only 
because  of  statutes,  which  may  be  described  generally  as  pro- 
hibiting perpetuities."  How  lacking  in  seriousness  this  objection 
is  may  be  answered  by  the  Massachussetts  Commissioner's  report 
and  by  what  has  been  said  ante.7  But  Mr.  Stetson  also  says: 
"As  to  ills  of  corporate  management  inflicted  on  the  members 
of  the  corporation,  the  derelictions  or  usurpations  of  directors, 
it  is  to  be  observed  that  such  ills  are  such,  and  such  only,  as 
may  be  practiced  by  any  trustee  upon  his  beneficiary.  My 
own  observation  is  that  as  to  such  breaches  of  trust,  the  law 
of  corporations  and  the  correction  by  courts  of  equity,  and 
criminal  courts,  are  far  more  specific  and  comprehensive  than 
usually  obtained  in  cases  of  personal  trust." 

This  author  greatly  doubts  the  correctness  of  Mr.  Stetson's 
observation,  and  thinks  it  must  have  been  confined  to  ordinary 
trusts,  where  opportunity  for  embezzlement  was  not  safeguard- 
ed against.  Why,  however,  careful  provisions  in  trust  instru- 
ments may  not  protect  beneficiaries  of  a  business  trust  and 
dishonesty  of  trustees  not  make  them  amenable  to  criminal 
punishment,  it  is  difficult  to  imagine.  The  tremendous  exac- 
tions that  are  made  upon  corporations  at  home  and  abroad 
are  shown  by  Mr.  Stetson  and  to  escape  these  legitimately 
should  constitute  no  small  incentive  for  aggregated  capital  to 
adopt  the  trust  agreement  method  of  carrying  on  business. 

6Atlantic    Monthly,   July   1912. 
7Chapter  XIII. 

248 


CHAP.  XIX.]  CONTENTS  OF  TRUST  DECLARATION.  [§   155. 

§  155.  General  Directions  in  Trust  Agreements. — The  ap- 
pendix containing  precedents  adopted  by  trusts  in  active  opera- 
tion is  perhaps  better  for  guidance  in  the  matter  of  prescribing 
directions  for  the  management  of  a  business  trust,  than  general 
observations  on  this  subject.  There  are,  however,  some  general 
rules  of  law  that  ought  to  be  observed. 

1.  The  trust  instrument  should  fix  the  term  of  duration  of 
the  trust,  or  its  earlier  cessation  by  prescribed  action,  as  say 
by  a  vote  of  two-thirds   of  its  certificate  holders.     The  limit 
within  which  this  term  may  continue  and  its  form  of  expression 
are  referable  to  local  law,  as  explained.8 

2.  The  particular  business  to  be  conducted  should  be  stated 
with  enough  of  precision  to  notify  those  who  deal  with  trustees 
as  to  the  extent  of  their  powers. 

3.  The  instrument,  to  resolve  all  doubt  as  to  its  creation  of 
a  trust,  should,  along  with  the  vesting  of  the  legal  title,  commit 
to  the  trustees  the  absolute  control  of  the  trust  property,  with 
full  power  to  make  it  answerable  for  their  acts  and  contracts 
in  the  conduct  of  the  business  of  the  trust.     Any  power  of 
removal    or   change   of   trustees    should    exclude   any    right   to 
invalidate  prior  contracts,  or  repudiate  responsibility  for  prior 
acts,  within  the  apparent  scope  of  their  powers. 

4.  The  particular  property  of   which  the  trust   estate  is  to 
consist,   in  its  original  form  or  as  afterwards  to  be  invested, 
should  be  described  so  as  to  admit  of  ready  identification  and 
by  apt  words  the  legal  title  should  be  vested  in  the  trustees 
and  their  successors. 

5.  The  right  of  trustees  to  act  singly  or  by  a  majority  or 
collectively,  either  generally  or  specially,   should   be  set  forth, 
and  whether  or  when  their  contracts  should  be  in  writing,  or, 
if  oral,  what  ratification,  if  any,  of  a  single  trustee's  acts  should 
be  required  as  a  condition  precedent  to  their  validity.     Also  a 
collective  name  may  seem  to  be  of  advantage  to  a  trust.  If  so, 

SChapter  XIII,  ante. 

249 


§    155.]  CONTENTS  OF   TRUST  DECLARATION.  [CHAP.   XIX. 

the  trust  instrument  should  adopt  the  name,  with  such  signing 
and  counter-signing  as  it  may  seem  advisable  to  prescribe. 

6.  The  trust  instrument  should  vest  specifically  in  the  trus- 
tees the  right  to  stipulate  for  personal  exemption  from  liability 
in  the  making  of  contracts,  the  right  of  indemnity  out  of  the 
trust  where  they  may  be  held  personally  liable,  and  the  right  to 
pledge  the  trust  property  for  their  contracts  and  it  should  con- 
tain a  clause  for  exemption  of  certificate  holders  from  personal 
liability.    It  should  be  provided  that  all  written  contracts  should 
contain    these    features,    so    as    to    bring    them    to    the    notice 
of  parties  contracting  with  the  trustees. 

7.  The  instrument  should  provide  how  shares,  and  the  differ- 
ent kind  of  shares,  if  any,  in  a  trust  are  to  be  issued,  their 
transfer  and  how  evidenced,  that  they  are  personal  property  to 
pass   by   succession   as    other   personal   property   and   that   the 
death  of  a  holder  shall  not  affect  in  any  way  the  continuance 
of  the  trust,  nor  such  death  give  to  any  person  any  right  for  an 
accounting  or  partition. 

8.  Provisions     for    meetings     of    shareholders,    regular    or 
special,   election,  removal  or  change  of  trustees,  filling  vacan- 
cies, investigation  into  the  affairs  of  the  trust  and  reports  to 
shareholders,    and    for    amendments    of    the    trust     instrument. 
What  right  of  inquiry  a  certificate  holder  should  have,  of  his 
independent  motion,  might  be  thought  advisable  to  be  stated,  as 
well  as  under  what  circumstances  it  may  be  exercised.     It  is 
suggested  that,  if  there  is  a   fair   reason   for  independent  in- 
quiry by  a  certificate  holder,  this  could  be  made    plain    to    a 
reasonable  number  of  shareholders,  who  could  join  in  a  request 
and  this   right  thus  not   become  liable  to  abuse,  as   has  been 
alleged  in  regard  to  the  exercise  of  such  right  by  a  stockholder 
in  a  corporation.     The  place  of  a  business   should  be  stated. 

9.  Care  is  to  be  taken  that  in  change  'of  trustees  the  trust 
instrument  specifically  should  provide  that  their  successors  suc- 
ceed to  the  same  rights  and  powers  and  are  subject  to  the  same 

250 


CHAP.    XIX.]  UNNECESSARY    DETAIL.  [§    156. 

duties  and  liabilities  and  have  like  compensation  as  the  former 
trustees. 

10.  All  instruments  of  trust  should  merely  by  way  of  caution, 
make  specific  provision  that  in  no  instance  need  any  one  deal- 
ing with  the  trustees  have  any  obligation,  either  in  law  or 
equity,  resting  upon  him  to  look  after  the  application  of  any 
trust  funds  or  property  coming  into  the  hands  of  the  trustees. 
This  caution  is  in  view  of  an  old  doctrine,  about  purchasers 
from  trustees  seeing  to  the  application  of  purchase  money  to 
purposes  of  the  trust.  Such  a  provision  takes  away  all  question 
as  to  intent  of  settlors  in  this  regard.9 

The  provisions  above  instanced  would  seem  to  be  reasonably 
required  in  any  trust  instrument,  where  the  interests  are  repre- 
sented by  transferable  shares.  What  others  may  seem  useful 
would  depend  greatly  upon  the  business  in  contemplation.  Also, 
how  great  discretion  may  be  committed  to  the  trustees,  singly  or 
as  a  body,  keeping  always  in  view  that  the  exercise  of  discretion 
is  more  as  between  shareholders  and  trustees,  than  as  limiting 
their  powers  as  to  third  persons,  must  rest  always  with  the 
creators  of  a  trust. 

§  156.  Unnecessary  Detail  in  Trust  Instruments. — A  prime 
consideration  in  the  framing  of  trust  instruments,  after  clearly 
stating  the  purpose  of  the  trust,  is  not  to  restrict  so  greatly 
the  discretion  of  trustees  as  to  embarrass  its  operations  as  a 
business  concern.  A  trust  in  trade  stands  the  hazard  of  loss, 
especially,  if  the  holders  of  the  legal  title  may  not  conduct 
its  business,  generally,  as  if  they  also  possessed  the  bene- 
ficial interest.  The  business  management  ought  to  be  as  free 
as  that  with  which  it  is  in  competition.  Business  risks  must  be 
met  by  business  enterprise,  and,  generally,  it  might  be  thought 
sufficient  for  the  business  policy  of  a  trust  to  be  directed  by 
shareholders  in  an  advisory  way  and  by  their  selection  of  trus- 
tees representative  of  a  declared  policy. 

9  Ames   Cases  on  Trusts,  269;  2  Perry  on   Trusts   and  Trustees 
(6th   Ed.),   Sec.   788  et  seq. 

251 


§    157.]  TRUST   PURPOSES.  [CHAP.    XIX. 

Nevertheless  the  provisions  in  a  trust  instrument  are  some- 
what tentative  and  should  be  subject  to  amendment  as  experi- 
ence may  suggest.  While,  therefore,  a  trust  instrument  is  the 
measure  of  a  trustee's  power  as  to  third  persons,  and  of  his 
fidelity  to  the  interests  of  shareholders,  yet  its  susceptibility 
of  amendment  puts  it  upon  a  higher  plane  of  preference  than 
that  of  a  charter.  Neither  might  it  be  thought  to  make  its 
business  or  investment  therein  less  stable  than  as  regards  a 
corporation,  as  amendment  would  not  be  permitted  to  affect 
existing  indebtedness  and  the  touchstone  of  mutual  interest  ought 
to  presuppose  advantage  to  beneficiaries.  What  is  for  their 
advantage  reacts  naturally  in  creating  an  improved  business 
status.  Furthermore,  the  owners  of  a  trust  do  their  own 
amending,  while  legislatures  frequently  amend  charters.  Trust 
owners  always  have  the  privilege  of  prescribing  all  that  a  legis- 
lature may  think  appropriate  for  the  management  of  a  corpora- 
tion, or  to  vary  that  for  what  they  may  deem  better  calculated 
to  advance  their  interests. 

Indeed,  as  corporations  are  formed  under  constitutional  pro- 
visions reserving  the  right  to  amend  charters,  the  position  of 
a  business  trust  seems  much  superior  to  that  of  a  corporation, 
the  'former  amending  its  trust  instrument  or  not,  as  those 
interested  in  the  trust  may  see  fit,  while  stockholders  in  the 
latter  must  accept  amendments  whether  they  like  them  or  not. 

§  157.  Purposes  of  Trust  Estates  in  Business. — It  has  been 
said  that:  "Every  kind  of  valuable  property,  both  real  and 
personal,  that  can  be  assigned  at  law  may  be  the  subject-matter 
of  a  trust;"10  and  that:  "A  trust  may  be  created  for  any  pur- 
pose for  which  a  contract  may  lawfully  be  made."11  A  few 
states,  however,  particularly  enumerate  the  lawful  purposes  of 
trusts.  New  York,  wherein  those  involving  real  property  are 
confined  to  specified  objects12  is  an  example  of  this  class. 

lOPerry  on  Trusts  and  Trustees   (6th  Edition),  Sec.  67. 
UStimson's  American  Statute  Law,  Section  1731. 
12III  Gumming  &  Gilbert's  Gen.  Laws  of  N.  Y.  (1906),  p.  3286, 
§  76. 

252 


CHAP.    XIX.]  TRADE    NAME.  [§     158. 

Trust  estates  in  business  have  frequently  been  created  in 
New  York  as  shown  by  cases  coming  before  the  appellate  courts, 
and  these,  as  well  as  cases  from  other  states  illustrate  the 
diversified  range  of  purposes  pursued,  for  example:  the  manu- 
facture and  sale  of  cotton  goods  ;13  holding  shares  in  various 
submarine  cable  companies;14  buying,  selling  and  improving 
real  estate;15  ownership  and  disposition  of  patent  rights;16 
operating  a  wagon  factory;17  a  railroad,18  a  store,19  a  general 
mercantile  business,20,  a  plantation,21  a  coal  mine,22  a  general 
lumber  and  salt  business.23  These  examples  are  capable  of 
multiplication  indefinitely,  but,  although  the  nature  and  number 
of  purposes  of  trust  estates  in  business  may  be  thought  general- 
ly to  include  the  entire  range  of  lawful  purposes  which  may 
actuate  any  individual  in  the  exercise  of  his  broadest  rights 
to  gain  a  livelihood,  still  the  warning  is  here  given  that  the 
statutes  of  each  state  should  be  carefully  consulted  by  local  prac- 
titioners who  are  better  qualified  to  pass  on  this  matter  than  the 
author  of  this  general  work. 

§  158.  Adoption  of  Name  for  a  Business  Trust. — Strictly 
speaking  it  may  be  said  that  a  trust  cannot  adopt  a  name.  It 
has  no  power  to  do  anything  implying  either  volition  or  dis- 
sent. It  is  merely  property  with  a  characteristic  attached  to, 
or  inhering  in  it.  But  trustees,  who  represent  it,  and  may  charge 

ISThorn  v.   DeBreteuil  (1904),   179  N.  Y.  64,  71  N.  E.  470. 

l^Smith  v.  Anderson  (1880),  15  Ch.  Div.  247. 

ISHart  v.  Seymour   (1893),  147  111.  598,  53  N.   E.   246. 

l6Mayo  v.  Moritz  (1890),  151  Mass.  481,  24  N.  E.  1083. 

17Pittsburg  Wagon   Works'   Estate    (1903),   204  Pa.  432,  54  Atl. 
316. 

iSWright  v.  Caney  River  Ry.  Co.  (1909),  151  N.  C.  529,  66  S.  E. 
588,  19  Am.  &  Eng.  Anno.  Cas.  384.    - 

l9Matthews  v.   Stephenson   (1847),   6   Pa.   St.    (Barr)   496. 

20Connally  v.  Lyons  (1891),  82  Tex.  664,  18  S.  W.  799,  21  Am. 
St.  Rep.   935. 

21Hewitt  v.  Phelps  (1881),  105  U.  S.  393. 

22In  re.  Raybould   (1900),  1  Ch.  199,  82  L.  T.  N.  S.  46. 

23Loud  v.  Winchester  (1883),  52  Mich.  174. 

253 


§   159.]         STIPULATIONS  IN  TRUST  INSTRUMENT —         [CHAP.   XIX. 

it,  are  individuals,  sui  juris,  and  they  may  adopt  a  name  or 
names  for  transacting  business,  executing  contracts  or  suing 
and  being  sued.24  As  the  trustees  alone  contract  and  their 
contracts  are  personal  the  adoption  of  a  name  is  by  them, 
though,  for  the  sake  of  caution,  the  instrument  may  so  direct. 
Statutes  may  put  some  limitation  on  the  adoption  of  business 
names,  as  is  done  so  far  as  regards  the  selection  of  a  name  for 
a  corporation,  but  if  they  are  silent  on  this  subject,  it  may  be 
said  either  an  artificial  name  or  one  that  may  be  applied  to  a 
natural  person  may  be  -chosen,  so  long  as  it  does  not  interfere 
with  a  trademark  or  otherwise  be  deemed  unfair  competition.23 
Out  of  caution  it  is  suggested,  that  where  statute  prescribes  for 
registration  of  names  used  for  business  purposes  compliance 
should  be  had  with  its  provisions.  So  where  it  is  forbidden  for 
those  unincorporated  to  use  a  name  implying  corporation.26  In 
such  a  state  the  adopted  name  could  have  added  to  it,  for  ex- 
ample the  words  "Not  Inc."  or  "Trustees."  The  adopted  name 
may  be  protected  for  the  same  reason  that  may  prevent  its 
unfair  assumption  of  a  name,  as  above  indicated.27  The  as- 
sumption of  a  name,  therefore,  cannot  be  supposed  to  have  any 
bearing  on  the  question  of  personal  liability  of  trustees.  All 
contracts  are  their  contracts  and  they  are  personally  liable  to 
third  parties,  unless  they  stipulate  for  exemption,  but  even 
though  they  be  so  liable  their  right  of  indemnity  is  reserved. 

§  159.  Stipulations  in  Trust  Instrument  as  to  Trustee's  Con- 
tracts.— As  seen,28  courts  diligently  but  with  indifferent  suc- 
cess, have  sought  to  apply  to  the  workings  of  corporations  what 
is  called  "the  trust  fund  theory."  This  is  our  ideal  of  inherent 
justice.  The  history  of  corporations  strenuously  has  called,  but 
often  in  vain,  for  its  application.  That  history  has  shown  some- 

24Carlisle  v.  People's  Bank  (1898),  122  Ala.  446,  26  So.  115; 
Pease  v.  Pease  (1868),  35  Conn.  131,  95  Am.  Dec.  225;  England  v. 
New  York  Pub.  Co.  (1878),  8  Daly  (N.  Y.)  375. 

25England  v.  N.  Y.  Pub.  Co.  supra;  29  Cyc.  270. 

26pe0ple  ex  rel.  Power  v.  Rose  (1905),  219  111.  46,  76  N.  E.  42. 

27See  also  Aiello  v.  Montecalfo  (1899),  21  R.  I.  496;  44  Atl.  931. 

2*Ante  Chapter  XVIII. 

254  , .  i 


CHAP,  xix.]  — AS  TO  TRUSTEE'S  CONTRACTS.  [§  159. 

thing  like  a  vanishing  morality.  The  personality  of  official* 
has  been  obscured.  They  apply  a  different  rule  to  their  repre- 
sentative acts  from  what  they  observe,  not  only  in  their  purely 
personal  conduct,  but  also  in  what  they  do  in  any  other  fiduci- 
ary relation.  In  nothing  else,  indeed,  is  there  such  a  reversal 
of  form  and  fact  as  in  corporate  management,  in  popular  opin- 
ion, and  measurably,  in  legal  effect.  Because  a  corporation  is 
a  person  and,  therefore,  may  contract  and  be  contracted  with, 
it  is  forgotten  that  any  person  besides  it  is  responsible,  in  foro 
conscientiae,  for  its  unconscionable  acts. 

It  is  difficult,  if  not  practically  impossible,  for  the  personality 
of  a  trustee  to  be  merged  in  the  trust  he  represents.  The  near- 
est approach  to  such  absorption  is  when  he  contracts,  as  a 
principal,  upon  the  sole  responsibility  of  the  trust  estate.  This, 
however,  expressly  must  be  stipulated  for  and,  ipso  facto,  he 
becomes  trustee  in  a  two-fold  capacity,  trustee  for  the  creditor 
so  contracting  with  him  and  trustee,  as  before,  for  cestuis  que 
trust.  Therefore  his  contracts,  with  exemption  from  personal 
liability,  impliedly  represent,  that  the  trust  estate  is  solvent, 
and,  if  the  reverse  is  the  fact,  a  court  of  equity  might  disregard 
the  stipulated  exemption,  at  least,  if  the  trustee  conceals  the 
fact  of  insolvency.  Certainly  it  would  seem  a  fraud  for  a  trus- 
tee to  obtain  a  release  from  personal  liability  under  such  cir- 
cumstances, as  fraud  vitiates  all  contracts. 

It  is  not  meant  here  to  intimate  that  third  persons  ordinarily 
may  have  a  personal  action  against  a  trustee,  where  they  agree 
that  he  shall  not  be  personally  bound,  because  they  are  obligated 
to  act  as  prudent  men  in  making  inquiries,  but,  if  they  do  make 
them,  the  trustee  is  bound  to  full  disclosure  and,  at  all  events, 
not  to  practice  any  deception.  When  a  corporation  contracts, 
it  is  not  expected  that  its  agent  may  be  fully  informed  as  to 
its  solvency. 

For  this  and  other  reasons  it  has  been  thought  not  sufficient 
in  this  character  of  trust,  that  there  only  should  be  direction  for 
express  stipulation  with  third  persons  for  exemption  of  trustee 

255 


§    161.]  INSURANCE.  [CHAP.    XIX. 

from  personal  liability.  There  should  be  a  general  provision 
for  his  indemnity  as  to  any  act  or  contract  within  his  rightful 
discretion  as  trustee,  for  which  he  might  be  adjudged  person- 
ally liable. 

§  160.  Insurance. — Making  Trustee  Secure  Against  Per- 
sonal Loss. — Insurance  of  every  kind,  fire,  cyclone,  indemnity, 
or  fidelity  bonds,  add  just  so  much  to  the  credit  of  the  trust 
estate,  as  conserving  the  assets  against  adverse  contingencies. 
Creditors  who  have  agreed  to  look  only  to  the  trust  estate  for 
payment  would  naturally  be  interested  in  their  security  thus 
being  made  "doubly  sure".  Where  tort  or  implied  contract 
liability  may  appear,  however,  self  interest  dictates  to  the  trus- 
tees a  policy  of  maintaining  every  class  of  insurance  which  will 
keep  intact  the  trust  fund,  so  that  their  right  of  indemnity  may 
be  practicably  exercised. 

The  trust  instrument  may  particularly  authorize  various 
kinds  of  insurance,  or  place  it  generally  within  the  discretion  of 
trustees.  Insurance  against  tort  liability,  as  now  carried  by 
many  corporations,  is  particularly  appropriate  where  the  trust 
is  carrying  on  a  business  involving  these  hazards.  Bonds  from 
employees  may  also  be  considered  as  particularly  desirable. 

It  is  conceivable,  that  arrangements  of  this  kind  are  greatly 
more  susceptible  of  application  to  a  trust  in  business  than  to  a 
corporation,  and  that  they  foster  confidence  on  the  part  both  of 
third  persons  contracting  with  trustees  and  of  investors  in  the 
shares  of  the  trust. 

§  161.  Directions  as  to  Acts  by  Subordinate  Agents. — The 
fact  of  giving  to  trustees  power  to  manage  a  business  with  as 
uncontrolled  discretion,  as  if  they  were  its  real  owners,  implies 
that  they  may  adopt  the  usual  means  to  the  attainment  of  the 
purpose  intended.  Nevertheless,  if  restriction  in  any  way  as 
to  this  is  desired,  the  trust  agreement  should  provide  therefor. 
Care  should  be  exercised,  however,  that  any  limitation  on  gen- 
eral authority  should  be  clearly  expressed,  and  generally  it  may 
be  said,  that  trustees  should  be  directed,  where  there  are  several, 
256 


CHAP.    XIX.]  TEMPORARY    INVESTMENTS.  [§    162. 

to  prescribe  rules  and  regulations  to  be  followed  by  their  sub- 
ordinates and  employees.  This  is  a  detail  in  management,  and 
it  would  rather  seem,  that  it  should  be  left  to  the  trustees.  It 
is  to  be  remembered,  always,  that  trustees  are  principals  and 
subordinates  are  their  agents,  not  agents  of  the  trust  estate. 
In  their  favor  is  the  right  of  indemnity  or  not,  and,  therefore, 
they  should  have  a  free  hand  in  the  selection  and  control  of 
their  agents.  If  they  select  inefficient  agents  or  do  not  exercise 
proper  supervision  over  their  acts,  the  certificate  holders  have 
their  remedy  in  a  change  of  trustees,  as  the  trust  instrument 
should  provide. 

Furthermore,  it  is  suggested  that  a  court  of  equity  more 
closely  would  scrutinize  the  reasons  for  selection  or  retention 
of  incompetent  or  unfaithful  agents  by  trustees,  when  indem- 
nity for  loss  on  account  of  their  acts  or  defaults  is  claimed,  than 
in  the  case  of  an  officer  of  a  corporation.  The  burden  would 
be  on  the  trustee  to  prove  his  right  to  indemnity,  or,  at  least, 
a  prima  facie  case  or  one  calling  for  explanation  more  readily 
might  be  established  against  him  than  against  a  corporate  officer. 

§  162.  Temporary  Investments  by  Trustees. — The  question 
of  investments  by  trustees  generally  is  understood  to  mean  such 
employment  of  funds  in  their  hands  as  would  prevent  their 
being  unproductive.  In  a  trust  embarked  in  trade  the  trust 
instrument  naturally  contemplates  that  the  entire  capital  of  the 
trust  estate  shall  be  devoted  to  the  protection  and  prosecution 
of  that  business,  with  the  profits  therefrom  to  be  distributed, 
as  income  from  land  or  securities  is  distributed. 

Therefore,  provisions  for  investment  in  this  character  of 
trust  are  designed  as  an  aid  to  the  business  carried  on,  with 
resultant  or  ultimate  benefit  to  cestuis  que  trust.  In  other  words, 
it  constitutes  a  detail  in  the  management  of  the  business  and 
subsidiary  to  its  purpose.  It  might  be  resorted  to,  as  occasion 
arose,  as  the  best  means  temporarily  to  measure  the  assets  of 
the  trust  estate  or  keep  unimpaired  its  original  capital,  as  well 
as  to  enhance  the  profits  of  the  business  itself.  It  might  apply 
to  any  reserve  the  trustees  may  be  directed  by  the  trust  instru- 

257 


§    162.]  TEMPORARY    INVESTMENTS.  [CHAP.    XIX. 

ment  to  keep  on  hand  against  contingencies,  or  to  earnings  be- 
ing accumulated  during  the  intervals  of  prescribed  distribution 
of  profits.  It  is  within  the  province  of  trust  instruments  to 
direct  specially  or  generally  the  classes  of  securities  required  or 
preferred  as  investments,  or  to  leave  that  to  the  discretion  of 
the  trustees.  At  all  events,  the  whole  subject  is  comprised 
within  the  general  purpose  of  judicious  management  for  the 
earning  of  profits  and  having  them  ready  for  distribution  at 
such  stated  intervals  as  may  be  prescribed.  It  might  be  said, 
however,  that  as  some  investment  might  be  desired  other  than 
the  ordinary  conduct  of  the  business  might  require,  the 
constating  instrument  ought  to  prescribe  in  reference  to  the 
concurrence  of  approval  by  the  trustees  or  a  majority  thereof. 
Thus  it  was  provided  in  the  trust  deed  upheld  in  Smith  v.  An- 
derson,29 that  between  periods  of  distribution  of  income,  the 
trustees  could  make  investments  in  Exchequer  Bills  or  the  in- 
come deposited  in  banks  at  interest. 

It  is  thought  that  decision  regarding  investment  by  trustees 
of  funds  not  embarked  in  trade  do  not  pertain  very  closely  to 
the  subject  in  hand,  though  it  might  be  thought  that  a  general 
discretion  in  trustees  to  invest  primarily  for  the  benefit  of  a 
trust  estate  in  trade  ought  to  be  exercised  under  like  limita- 
tions, as  where  a  trust  fund  is  designed  to  be  kept  unimpaired 
as  a  corpus  for  remaindermen.  In  other  words  this  discretion 
should  not  be  exercised  so  as  to  jeopardize,  in  the  least,  the 
success  of  the  business  of  the  trust  estate,  however  attractive 
an  investment  might  appear  to  be,  if  that  investment  partakes 
in  any  way  of  a  speculative  venture.  To  do  this  would  be  to 
elevate  an  incidental  power  above  the  main  purpose.  Happily, 
however,  this  question  may  be  taken  out  of  the  domain  of  con- 
troversy by  specific  direction  in  trust  instruments,  but  the 
principle  urged  might  be  useful  even  in  the  settling  of  any 
ambiguities  in  expression. 

How  strict  the  rule  in  ordinary  trusts  is  against  investment 
in  stocks  of  a  speculative  character  is  illustrated  by  a  great 

29(1880),   15  Ch.  Div.  247. 

258 


CHAP.  XIX.]  TEMPORARY   INVESTMENTS.  [§    162. 

abundance  of  decision  and  statutes  generally  may  be  said  to  be 
but  declaratory  of  its  underlying  principles.  The  formulation 
of  this  rule  as  shown  by  English  cases  as  this  is  expressed  by 
a  New  York  Court  is  as  follows:  "It  may  now  be  regarded  as 
the  well-settled  rule  of  the  English  Court  of  Chancery  that  the 
trustee  can  only  protect  himself  against  risk  by  investing  the 
trust  fund  in  real  or  governmental  securities."30  The  court 
further  said:  "The  rule  established  in  England  has  not  been 
abrogated  or  altered  by  any  legislative  action  in  this  state.  Nor 
has  it  been  impaired  or  affected  by  the  decision  of  any  of  our 
courts,  if  indeed  it  could  be  changed  by  judicial  authority,"  the 
latter  clause  intimating  that  it  is  inherent  in  a  trust  estate  that 
its  corpus  must  be  preserved,  and  to  invest  it  other  than  safely 
is  to  take  the  risk  of  waste.31  There  is  a  conflict  of  view  among 
American  Courts  as  to  whether  the  strictness  of  the  English 
rule  should  obtain,32  there  being  a  more  liberal  doctrine  applied 
in  some  State  Courts,  but  it  is  scarcely  conceivable  that  the 
temporary  investment  of  idle  funds  of  a  trust  estate  in  business 
would  call  for  its  application,  because  it  is  of  the  essence  of 
the  exercise  of  the  power  of  investment  in  such  a  case,  that  the 
securities  should  be  as  readily  usable  as  the  money  they  repre- 
sent, and  that  with  a  minimum  of  danger  of  loss.  The  language 
of  the  Pennsylvania  Supreme  Court  regarding  a  trustee,  who 
should  invest,  has  additional  force  in  a  case  where  the  trustee 
should  provide  against  not  being  able  to  produce  the  principal 
at  all  times  it  may  be  needed  for  business  purposes.  It  was  said : 
"The  object  of  a  prudent  man  was  to  make  money,  the  duty  of 
the  trustee  was  to  take  care  of  it."33  While  the  object  of  a 
trustee  of  a  trust  embarked  in  trade  is  to  make  money,  it  is 
also  his  imperative  duty  to  save  it  to  be  invested  as  prescribed. 

While,  therefore,  it  may  be  thought  that  statutes  should  be 
looked  to  to  guide  a  trustee  in  business  as  limitations  on  his  pow- 

SOAckenman  v.  Emott  (1848),  4  Barb.  626,  636. 
SISee  also  Penn  v.  Folger  (1899),  182  111.  76,  55  N.  E.  192;  Sim- 
mons v.  Oliver  (1889),  74  Wis.  633,  43  N.  Wl  561. 

32Willis  v.  Braucher  (1909),  79  Oh.  St.  290,  87  N.  E.  185. 
33Hart's  Estate  (1902),  203  Pa.  480,  53  Atl.  364. 

259 


§    162.]  TEMPORARY    INVESTMENTS.  [CHAP.    XIX. 

er  in  temporary  investment  of  its  funds,  as  occasion  might  arise,, 
yet  it  would  seem  they  should  not  be  regarded  as  authority  to 
invest,  because  such  legislation  is  scarcely  to  be  supposed  as 
having  such  investments  in  view.  They  aim  at  safe-guarding 
the  corpus  of  an  estate,  while  furthering  intent  of  income  there- 
from, and  preventing  its  withdrawal  from  commerce.  The 
capital  of  a  trust  in  business  is  ventured  along  lines  wholly 
outside  of  statute  and  investment  outside  of  those  lines  would 
be  merely  incidental.  Generally,  therefore,  it  may  be  thought, 
that  there  is  no  duty  upon  trustees  of  a  capital  embarked  in 
trade  to  make  any  use  of  any  part  thereof  except  in  that  busi- 
ness, and  that  to  tie  it  or  any  part  of  it  up,  other  than  in  se- 
curities readily  convertible  into  money,  might  be  a  breach  of 
duty,  unless  specific  authority  therefor  is  contained  in  the  trust 
instrument.  It  has  been  thought  advisable,  however,  to  refer 
to  authority  regarding  ordinary  trusts  for  principles  that  may, 
by  analogy,  be  found  applicable.  The  result  is  that  specific 
provision  for  investment  ought  to  appear  in  the  trust  instru- 
ment, though  general  discretion  might  embrace  it  as  a  detail 
in  management. 


260 


CHAPTER  XX. 
STIPULATIONS  IN  INSTRUMENTS  ESTABLISHING  TRUST  ESTATES 

IN  BUSINESS. — CONTINUED. 

Capital — Shares — Publicity — Incumbrances — Termination  of 
Trust — Recording. 

§  163.  Corporate  Capitalisation. — What  is  seriously  thought 
to  be  one  of  the  great  evils  in  our  age  is  over-capitalization  of 
corporations.  Yet  despite  it  being  inveighed  against  so  greatly 
by  economic  writers  and  legislators,  statutes  for  the  formation  of 
corporations,  instead  of  curbing  overcapitalization,  really  encour- 
age it.  They  attempt  to  confine  statement  in  the  charter  asked  for 
to  a  true  showing  of  actual  capital,  but  they  allow  as  to  every- 
thing but  actual  money  an  estimate  by  corporators  or  promot- 
ers to  stand  for  such  actual  capital.  Such  large  expenses  in 
the  way  of  corporate  organization  are  permitted,  as  for  ex- 
ample in  free  stock  to  promoters  and  selling  original  stock  be- 
low its  face  value,  that  very  often  a  corporation  begins  business 
with  far  less  of  actual  capital,  than  the  aggregate  of  its  out- 
standing shares.  Indeed,  it  suggests  financial  legerdemain  to 
see  corporators  swearing  they  have  paid  par  for  stock  in  a 
new  corporation  and  the  latter  selling  treasury  stock  at  an 
extraordinary  discount  even  before  it  begins  operations. 

But  let  it  be  supposed  that  statutes  are  effective  to  compel  a 
corporation  to  begin  business  with  its  purported  capital  wholly 
intact,  yet,  if  that  capital  becomes  impaired  by  business  losses, 
that  fact  is  not  reported.  Indeed,  the  more  greatly  losses  or 
depreciation  has  impaired  capital,  the  more  industriously  is  the 
fact  concealed.  This  is  -one  of  the  secrets  of  business,  of  which 
supposedly  the  public  has  no  right  to  be  informed,  notwith- 
standing it  has  every  right  to  know  what  was  its  capital  when 

261 


§    163.]  CORPORATE    CAPITALIZATION.  [CHAP.    XX. 

it  began  business.  And  so  the  public  is  to  be  informed  when 
there  is  a  voluntary  withdrawal  of  part  of  the  original  capital, 
statutes  generally  requiring  publication  to  be  made.  But  how 
is  the  public  interest  subserved  by  this  requirement,  if  equally 
it  would  not  be  subserved  by  compelling  corporations,  whose 
capital  has  for  any  reason  become  seriously  impaired,  to  publish 
the  fact  and  forbid  the  corporation  afterwards  to  claim  that  its 
capital  remains  as  it  was? 

Furthermore,  where  property  other  than  money  originally 
was  or  subsequently  became  its  capital,  either  it  increases  in 
value  or  it  decreases.  It  is  barely  probable  that  it  remains  the 
same.  Indeed  in  some  kinds  of  corporations,  as  for  example  a 
mining  corporation,  the  very  purpose  of  incorporating  is  first 
to  develop  and  then  exhaust  the.  capital.  Its  charter,  however, 
is  as  unchanging  as  a  law  of  the  Medes  and  Persians. 

Any  corporation,  whose  assets  increase,  either  by  earnings 
held  as  surplus  or  by  property  appreciating  in  value,  promptly 
takes  the  public  into  its  widely  advertised  confidence,  and  pro- 
fesses to  do  this  often,  when  that  increase  is  based  more  on 
hope  than  a  fair  inventory  of  assets.  But,  if  the  reverse  is 
really  true,  the  corporation  is  overcapitalized,  however  true  and 
honest  was  its  original  capitalization.  It  is  submitted,  that 
what  has  been  recited  above  as  to  corporations  is  well-known 
to  be  difficult,  if  not  wholly  impossible,  completely  to  rectify  by 
means  of  statute  or  any  procedure  in  equity. 

It  has  been  urged  that  not  only  is  this  an  evil,  whereby  abuse 
of  charter  powers  affects  others  than  stockholders  in  corpora- 
tions, but  it  militates  against  business  success  by  corporations 
trading  under  the  burden  of  overcapitalization.  It  has  been 
said  that  a  corporation  will  stagger  under  overcapitalization, 
because  it  is  so  pressed  for  money  to  pay  dividends,  that  it 
neither  conserves  nor  improves  its  plant,  nor  installs  latest  de- 
signs in  machinery,  nor  adopts  labor-saving  and  life-saving  de- 
vices. Certainly  its  false  pretense  does  not  attract  loyalty  to 
its  management  and,  indirectly,  it  encourages  graft.  It  can 
262 


CHAP.    XX.]  ASSETS    OF    TRUST.  [§    164. 

never  reserve  a  surplus  for  emergencies,  for  faith  in  it  is  a 
minus  quantity,  and  it  is  on  the  way  to  becoming  the  sport  of 
adverse  conditions  and  relentless  competition.  It  suffers  the 
fate  of  discovered  hypocrisy,  showing  that  even  with  a  soulless 
thing  "Honesty  is  the  best  policy." 

§  164.  Capitalisation  of  Trusts  in  Business. — It  may  be 
that  to  many  it  will  not  be  clear,  that  the  substitution  of  volun- 
tary associations  under  trust  agreements  with  the  like  exemp- 
tion of  liability  from  debts  of  shareholders,  promises  any  relief 
from  the  evils  above  alluded  to.  Freely  it  may  be  confessed  that 
cestuis  que  trust  may  set  on  foot  businesses  with  pretended 
assets  and  trustees  may  be  found  responsive  to  an  embarka- 
tion with  bellying  canvas  too  large  for  safe  voyage.  Never- 
theless, it  is  certain  that  honest  enterprise  has  the  freest  oppor- 
tunity to  shape  its  intent  by  appropriate  provisions  in  an 
agreement  creating  a  trust,  and  also  it  is  certain  that  behind 
that  intent  there  lies  not  the  cheese-paring  construction  that  has 
been  applied  to  corporate  rights,  powers  and  liabilities. 

Familiar  principles  in  the  law  of  fraud  should  deter  cestuis 
que  trust  from  participating  with  trustees  in  representing  that 
a  trust  estate  embarked  in  business  is  a  different  thing  in 
character  or  value  from  what  it  is  represented  to  be.  In  limine 
a  court  of  equity  would  be  disposed  to  hold,  that  the  organiza- 
tion of  a  different  thing  than  what  was  purported  to  be  organized 
scarcely  could  be  deemed  the  creation  of  a  trust  estate.  The  last 
analysis  of  such  a  conclusion  would  be  that  stipulations  and 
provisions  and  even  notices  to  third  persons  touching  exemp- 
tions from  liability,  in  favor  either  of  trustees  or  cestuis  quo 
trust,  were  unavailing,  and  a  joint  and  several  liability  would 
extend  to  all  concerned.  It  requires  no  stretch  in  reasoning  to 
extend  this  conclusion  to  trustees  alone  who,  in  managing  a 
trust  estate  merely  pledge  the  trust  estate,  impliedly  or  expressly 
representing  it  is  in  value  and  responsibility  what  it  purports 
to  be.  A  court  of  equity  would  be  alert  in  holding  them  to 
the  exercise  of  good  faith,  and  all  right  of  indemnity  or  insur- 
ance against  loss  might  crumble  before  an  adverse  finding. 

263 


§    165.]  TRUE    STATEMENT    OF    ASSETS.  [CHAP.    XX. 

Therefore  it  seems  too  risky  both  for  cestuis  que  trust  and 
trustees  to  organize  a  trust  estate  for  business  except  upon  the 
basis  of  good  faith.  And  it  may  be  further  said,  that  possibly 
the  last  thing  in  the  world  an  irresponsible  promoter  with  a 
scheme  for  bonuses  and  free  stock  would  conceive,  as  a  sub- 
stitute for  a  corporation,  would  be  a  trust  estate  controlled  by 
a  court  of  equity. 

§  165.  The  Capital  of  a  Trust  Estate  in  Business. — A  trust 
estate  is  merely  property,  the  legal  title  to  which  is  vested  in  a 
trustee  with  the  beneficial  interest  in  another  or  others.  It  is 
therefore  property  committed  to  trustees,  and  immediately  there- 
upon the  trust  relation  arises  as  to  it  and  every  part  thereof. 
For  it  and  all  of  it  and  for  what  arises  out  of  it  the  trustee 
becomes  forthwith  responsible.  It  may  be  true,  that,  if  specific 
property  other  than  money  constitutes  the  trust  estate,  any 
valuation  set  upon  it  might  be  lawful  between  the  parties,  and 
even  a  thousand  dollars,  for  example,  might  be  called  another 
amount,  but  it  is  easily  to  be  seen,  that  this  opens  up  a  far 
greater  possibility  of  embarrassment  to  trustees,  who  are  per- 
sonally responsible  for  what  they  receive,  than  might  arise  out 
of  the  like  way  of  doing  in  the  formation  of  a  corporation.  No 
prudent  responsible  trustee  would  acknowledge  to  have  received 
one  hundred  thousand  dollars,  when  as  a  matter  of  fact  there 
had  been  delivered  to  him  fifty  thousand.  The  transaction 
would  be  a  badge  of  fraud  and  every  provision  of  a  supposed 
trust  agreement  might  be  vitiated  thereby,  with  the  result  that 
trustees  and  beneficiaries  would  become  jointly  and  severally 
liable  for  all  acts  and  contracts  of  the  former. 

We  will  suppose,  then,  that  the  trust  agreement  provides  for 
a  true  statement  or  honest  estimate  of  the  value  of  the  property 
delivered  to  a  trustee  to  be  employed  by  him  as  capital  in  the 
business  intended  to  be  conducted.  The  creators  of  the  trust  may 
agree  among  themselves  as  to  the  proportions  they  severally  con- 
tribute to  this  capital  and  in  what  proportions  severally  they  are 
interested.  Also  they  may  provide  how  other  contributions  to 
the  original  capital  may  be  made  and  the  contributors  become 
264 


CHAP.    XX.]  DECREASE    OF    ASSETS — SHARES.  [§     166. 

entitled  to  proportional  interests.  In  other  words,  the  trust 
agreement  may  provide  for  enlarging  the  trust  capital  and  in- 
creasing the  beneficiaries.  The  reservation  of  proportional  in- 
terests by  the  creators  of  the  trust  is  as  simple  a  proposition  as 
a  testator  or  other  donor  embarking  a  trust  in  trade  for  the 
benefit  of  several  beneficiaries,  of  which  this  work  has  shown 
several  examples,  and  it  is  undoubtedly  within  contractual  ar- 
rangements to  provide  for  other  beneficiaries  coming  in. 

It  may  be  said  that  to  speak  of  the  capital  of  a  trust  estate 
is  properly  only  to  speak  of  its  corpus,  while  that  of  a  corpor- 
ation may  be  taken  to  be  that,  which  is  the  aggregate  sum  of 
its  shares  of  stock,  whether  the  assets  exceed  or  are  below  that 
sum.  Considering  a  trust  estate  in  business  with  this  distinc- 
tion and  where  no  others  are  interested  than  contributors  to 
its  corpus,  no  one  but  they  can  object  to  that  corpus  becoming 
impaired,  unless  they  be  creditors  who  are  injured  by  misrepre- 
sentation by  a  trustee. 

As  it  is  true  that  it  is  merely  property  and  nothing  else  that 
constitutes  a  trust  estate,  it  may  be  misleading  to  call  this  capital 
and  interests  therein  should  be  expressed  proportionately  or  in 
aliquot  parts,  that  is  to  say  in  shares  without  "par  value."  This 
suggestion  has  been  made  as  to  corporate  shares  and  its  approp- 
riateness may  seem  even  clearer  as  to  interests  in  a  trust  estate. 

§  166.  Interests  or  Shares  in  a  Trust  Estate. — As  suggested 
above  about  defining  interests  in  a  trust  estate,  it  is  to  be  further 
said,  that  it  comports  more  nearly  with  the  true  relation  between 
trustee  and  cestui  que  trust,  that  the  latter's  aliquot  part  in  the 
property  be  shown,  than  that  any  arbitrary  valuation  be  placed 
upon  it.  Every  cestui  que  trust  has  a  proportional  interest  in  a 
thing,  whether  its  value  be  one  amount  or  another,  and  he  is 
not  supposed  to  make  any  representation  on  that  subject,  and 
a  trustee's  representation  would  not  be  of  any  binding  effect 
upon  the  cestui.  It  may  be  thought  consistent  with  the  organi- 
zation of  a  corporation  to  speak  of  par  value  of  shares  in  capital 
stock  or  statute  may  so  require,  but  for  the  reasons  stated  this 

265 


§   167.]  COMMON  AND  PREFERRED   SHARES.  [CHAP.   XX. 

seems  out  of  place  in  defining  interests  in  a  trust  estate.  It  is 
not  intimated,  however,  that  the  interests  could  not  be  expressed 
as  of  so  much  money  value,  as  this  would  be  merely  another 
method  of  stating  an  aliquot  part. 

The  real  question  is  whether  a  trust  agreement  may  provide 
for  shares  in  a  trust  estate  and  evidence  thereof  in  such  a  way, 
that  they  may  be  transferred  as  shares  of  stock  in  a  corporation. 
In  the  first  place  it  seems  too  clear  for  controversy,  that  co- 
owners  may  agree  among  themselves,  by  a  competent  instru- 
ment in  writing,  what  are  their  respective  interests  in  property, 
the  legal  title  to  which  they  vest  in  another.  If  it  is  competent 
for  them  to  convey  to  him  absolutely,  it  is  also  competent  to 
apportion  among  themselves  their  reserved  equity.  In  the  next 
place  it  is  undoubtedly  true  that  one's  interest  in  a  trust  estate 
may  be  assigned  by  him  to  another,  as  it  is  property  that  is  sub- 
ject to  levy  and  sale  under  process.  There  being  then  the  jus 
disponendi,  it  is  a  mere  regulation  for  the  mutual  advantage  of 
co-owners  to  say  in  advance  how  the  exercise  of  that  right 
shall  be  evidenced.  As  between  seller  and  purchaser  this 
might  not  be  necessary,  but  that  a  purchaser  might  not  acquire 
a  status  to  the  possible  detriment  of  the  common  interest  may 
well  be  provided  for.  It  will  be  presumed  that  it  is  only  by  ac- 
ceding to  these  regulations  that  each  owner  of  an  interest  be- 
comes such. 

§  167.  Preferred  Shares  in  a  Trust  Estate. — May  there  be 
interests  like  preferred  stock  in  a  corporation?  Preferred  stock 
in  a  corporation  is  shares,  which,  while  on  a  higher  plane  of 
preference  than  ordinary  shares,  yet  is  secondary  in  the  scale 
of  obligation  by  a  corporation  to  the  claims  of  its  creditors.  If, 
as  has  been  shown,  a  trustee  may  contract  so  as  to  be  bound  in- 
dividually, or  to  exempt  himself  from  individual  liability  by 
pledging  the  trust  property,  why  may  not  a  trust  agreement 
provide  that  he  may  issue  shares  of  stock  making  the  trust 
estate  liable  after  creditors  are  paid,  just  as  are  corporate  assets 
liable  to  holders  of  preferred  stock?  It  is  all  a  matter  of  con- 
tract and,  if  investors  prefer  the  obligation  of  a  trust  estate  to 
266 


CHAP.    XX.]  PUBLICITY — REPORTS.  [§    168. 

pay  interest  out  of  net  earnings,  rather  than  to  invest  in  common 
shares  with  possibly  greater  profits,  that  kind  of  an  investment 
is  just  as  surely  a  contribution  to  trust  property,  so  far  as 
general  creditors  are  concerned,  as  is  investment  in  ordinary 
shares. 

§  168.  Publicity  of  Affairs  of  a  Trust  Estate. — Reports — Ac- 
countings.— Publicity  has  been  urged  as  a  means  for  the  pre- 
vention of  corporate  abuses,  and  generally  it  may  be  said  that 
the  dominant  note  in  all  argument  for  supervision  of  corpora- 
tions is  that  the  public  needs  this  and  should  apply  it  either  in 
the  exercise  of  the  State's  police  power  or  of  Congressional 
power  in  the  regulation  of  interstate  commerce.  The  rights  of 
creditors  are  not  so  much  heard  of,  though  bankruptcy  and  in- 
solvency of  corporations  fill  judicial  tribunals  with  questions 
that  never  would  have  arisen  under  honest  organization  and 
management  of  corporations,  and  still  less  do  we  hear  of  the 
need  of  protecting  the  rights  of  stockholders.  That  publicity 
is  needed  for  such  rights  because  secrecy  may  work  to  their 
prejudice  is  shown  by  a  very  recent  case  in  New  York,  in  which 
the  lower  appellate  court  was  reversed  by  the  higher.1 

In  the  lower  of  these  courts  it  was  held,  and  a  number  of 
decisions  by  the  U.  S.  Supreme  Court  were  cited  as  authority, 
that  a  stockholder,  paying  for  stock,  for  which  he  has  subscribed, 
less  than  its  par  value,  impliedly  agrees  to  become  bound  to 
the  corporation's  creditors  to  the  extent  of  the  difference.  The 
higher  court  held  that  where  the  subscription  is  to  pay  less  than 
par,  there  is  no  public  policy  in  favor  of  creditors  that  the  agree- 
ment should  not  be  observed.  Nevertheless,  the  corporation  is 
operating  under  false  pretense  of  having  a  capital  which  pub- 
licity would  show  it  did  not  possess.  If  the  lower  court  was 
right,  creditors  should  be  advised  as  to  corporate  assets,  and,  if 
the  higher  co,urt  is  right,  there  was  a  claim  of  capital  which  was 
false. 

iSouthworth   v.    Morgan,    128    N.    Y.    Supp.    196,    143    App.    Div. 
648;  same  case  (1912),  205  N.  Y.  — ,  98  N.  E.  490. 

267 


§     168.]  PUBLICITY — REGULATIONS    REGARDING.  [CHAP.     XX. 

As  said  supra2  it  is  believed  by  the  author  that  such  a  repre- 
sentation would  involve  both  trustee  and  cestuis  que  trust  in  a 
fraud,  making  them  jointly  and  severally  liable.  It  must  be 
remembered  that  a  corporation  may  make  representations,  but 
a  trust  estate  cannot,  and,  therefore,  when  a  trustee  in  conjunc- 
tion with  others  or  by  their  express  approval  makes  a  false 
representation,  the  matter  takes  on  a  different  phase.  It  has, 
apparently,  the  elements  of  a  conspiracy,  and,  if  the  cestuis  que 
trust  do  not  participate,  it  is  a  personal  act  wholly  outside  of 
the  trustee's  representative  capacity. 

Therefore  it  is  to  be  thought  that  publicity,  at  least  in  the  case 
of  numerous  cestuis  que  trust,  who  are  changing  by  the  sale  and 
purchase  of  transferable  shares,  is  a  privilege  greatly  to  be 
appreciated  by  a  prudent  trustee.  If  true  reports  are  made  by 
him,  he  establishes  his  good  faith  in  the  management  of  what  is 
confided  to  him,  and  admits  thereby  that  such  is  the  measure  of 
his  obligation  to  his  cestuis  que  trust. 

It  may  be  that  for  business  reasons  certain  information  some- 
times should  not  be  spread  broadcast,  and  such  limitation  upon 
indiscriminate  publicity  could  be  provided  for  without  the  trustee 
keeping  it  within  his  exclusive  knowledge.  In  other  words, 
revelation  to  a  standing  committee  could  be  made^  and  their 
judgment  relied  on  as  to  its  being  generally  announced.  If, 
however,  cestuis  que  trust  desire  no  such  limitation  on  disclosure, 
the  instrument  of  trust  unequivocally  may  so  declare. 

It  is  not  attempted  here  to  deny,  that  the  state,  within  its 
police  power  or  Congress  under  the  interstate  commerce  clause, 
or  either,  for  purpose  of  revenue,  may  require  specific  disclosure. 
That  question  it  is  unnecessary  to  consider.  It  is  submitted, 
however,  that  a  trust  instrument  as  to  publicity  and  how  far  it 
may  go  and  how  it  shall  be  made,  is  greatly  superior  to  a 
chanter  and  regulations  regarding  corporations,  because  the 
latter  are  universal  in  application,  and  the  former  may  be  framed 
for  a  particular  business  and  in  accordance  with  the  desires  of 

2§  158,  Ante. 
268 


CHAP.   XX.]  REPORTS — MORTGAGES.  [§    169. 

the  owners  of  that  business.  Where  this  does  not  work  out 
practically,  amendment  may  cure  defects.  The  trust  relation  is 
severe  in  holding  the  trustee  to  utmost  good  faith  towards  ces- 
tuis  que  trust,  and  his  personal  responsibility  to  third  persons 
is  absolute,  except  as  specifically  excepted,  but  within  these 
limitations  there  are  the  usual  rights  of  individuals  sui  juris. 

Providing  for  reports  and  restraining  the  right  of  indiscrim- 
inate examination  has  been  treated  in  §  138  of  this  book.  The 
absence  of  specific  directions  leaves  the  matter  as  stated  by  the 
Illinois  Supreme  Court:3 

"The  fact  that  the  times  and  manner  for  accounting  for  the 
rents  and  profits  of  the  trust  estate  are  not  fixed,  cannot  render 
the  trust  void.  The  law  will  compel  the  trustee  to  render  ac- 
counts in  proper  manner  and  at  proper  times.  The  absence  of 
specific  directions  as  to  when  and  in  what  manner  the  trustee 
shall  render  his  accounts  simply  leaves  that  matter  to  be  de- 
termined by  construction.  If  the  trustee  and  cestui  que  trust 
disagree  on  that  subject,  the  courts  may  be  resorted  to  for  a 
settlement  of  the  differences.  In  such  a  case,  the  parties,  and, 
if  necessary,  the  court,  would  be  compelled  to  take  into  con- 
sideration the  nature  of  the  property,  how  and  when  the  rents 
and  profits  will  probably  accrue,  and  all  other  facts  and  circum- 
stances affecting  the  question." 

§  169.  Mortgages  by  Trustees. — It  would  seem  not  greatly 
necessary,  in  view  of  authority  hereinbefore  considered,  that  it 
should  further  be  urged  that  a  trustee  may,  when  acting  within 
the  scope  of  authority,  so  contract  that  a  third  person  may  look 
only  to  the  trust  estate  for  payment.  The  extent,  however,  of 
that  authority  might  be  claimed  to  be  his  right  to  charge  the 
trust  estate,  while  providing  for  his  own  exemption  from  liability, 
in  the  contemplated  management  of  a  trust  estate,  and  that 
none  of  the  cases  cited  holds  he  can  raise  funds  upon  the  trust 
property  for  subsequent  use  in  its  management.  Besides,  we 
have  seen  that  there  is  a  limitation  upon  his  power  to  prefer  a 

SQrr  v.  Yates   (1904),  209  111.  222,  239,  70  N.  E.  731. 

269 


§    169.]  MORTGAGES.  [CHAP.    XX. 

creditor  by  mortgage  when  the  trust  estate  has  become  insolv- 
ent,4 even  though  the  indebtedness  had  before  that  been  regu- 
larly incurred.  And  it  has  been  emphasized  that  such  an  ex- 
emption depends  for  its  validity  on  the  fact  that  a  court  of 
equity  will  distribute  the  trust  property  equitably  and  propor- 
tionally among  creditors.5 

Therefore  it  would  be  the  exercise  of  a  doubtful  power  for 
a  trustee  to  incumber  trust  property,  though  embarked  in  trade, 
under  a  general  power  to  exercise  his  discretion  in  its  manage- 
ment, where  the  purpose  is  merely  to  raise  funds,  not  to  discharge 
present  indebtedness,  but  for  the  more  successful  conduct  of  the 
business  of  the  trust.  An  Iowa  case  goes  quite  far  in  expres- 
sion as  to  the  right  of  a  trustee  to  mortgage  trust  property  em- 
barked in  trade,  but  the  facts  of  the  case  show  the  mortgage 
was  for  indebtedness  previously  incurred.6  But  it  cannot  be 
denied  that  express  power  may  remove  all  doubt  in  this  matter. 
Thus  a  subscription  to  a  building  and  loan  association  by  a 
trustee,  as  a  step  toward  giving  a  mortgage  on  trust  property 
and  his  executing  such  mortgage,  was  upheld  under  a  provision 
saying  that  the  trustee  "for  the  purpose  of  managing  said  trust 
estate  and  changing  the  investment  thereof,  is  hereby  authorized 
at  any  time,  by  instrument  in  writing  in  which  said  cestui  joins 
during  her  life,  and  without  her  joining  after  her  death,  to 
pledge,  mortgage,  sell  or  exchange  or  otherwise  dispose  of  all 
or  any  portion  of  the  real  estate  and  personal  property  as  he 
may  deem  best."7  And  such  holding  is  in  clear  accord  with 
decision  that  though  a  mortgage  be  unauthorized  when  exe- 

*Woddrop  v.  Weed   (1893),  164  Pa.  307,  26  All.  375,  35  Am.  St. 
Rep.  832. 

SBank  of  Topeka  v.   Eaton   (1900),  100   Fed.  8;  Affd.  107  Fed. 
1003,  47  C.  C.  A.  140. 

«Roberts  v.  Hale   (1904),  124  Iowa  296,  99  N.  W.  1075. 

TBailie  v.  Carolina  Interstate  B.  &  L.  Asso.  (1896),  100  Ga.  20, 
28  S.  E.  274;  Cottingham  v.  Equitable  B.   &  L.  Asso.   (1902),  114 
Ga.  940,  41  S.  E.  72. 
270 


CHAP.    XX.]  MORTGAGES.  [§    169. 

cuted,  yet  it  is  validated  by  ratification  of  cestuis  que  trust.8 
Joinder  by  cestui  que  trust  in  a  mortgage  validates  it9  and  if 
the  trustee  is  one  of  the  cestuis  que  trust  his  interest  is  bound 
whether  the  interest  of  the  others  is  bound  or  not.10  It  is  a 
universal  principle  that  what  one  may  subsequently  ratify  he 
may  previously  authorize,  and  vice  versa. 

But  while  power  to  borrow  money  and  mortgage  trust 
property  might  be  implied  as  being  a  proper  and  necessary 
means  of  executing  the  purposes  of  a  trust,11  yet  each  case 
under  such  ruling  depends  upon  its  own  circumstances  and  the 
only  prudent  thing  to  do,  if  it  is  desired,  that  a  trustee  may 
have  power  to  borrow  and  mortgage,  is  for  a  trust  instrument 
specifically  to  provide  that  he  may  and  the  circumstances  under 
which  the  power  may  be  exercised. 

As  this  is  a  power  expressly  or  impliedly  to  be  granted,  the 
conditions  of  its  exercise  may  be  stated  as  fully  as  desired.  For 
example,  the  trustee's  power  in  this  special  regard  might  be 
declared  to  be  exercisable  only  upon  a  resolution  passed  by  a 
majority  of  shareholders  present  at  some  regular  or  special  meet- 
ing or  upon  approval  of  some  standing  committee  of  the  share- 
holders. 

Accordingly  as  the  trust  instrument  specifically  may  give  to  the 
trustee  the  right  to  encumber  trust  property  to  raise  money 
either  to  pay  off  indebtedness  or  to  create  a  fund  for  business 
operations,  prudently  it  may  provide  for  any  temporary  exigency 
or  for  the  creation  of  a  bonded  indebtedness  extending  over 
several  years. 

SBoon  v.  Hall  (1902),  78  N.  Y.  Supp.  557,  76  N.  Y.  App.  Div. 
520;  Magraw  v.  Pennock  (1853),  2  Grant  (Pa.)  89. 

OFonda  v.  Gibbs   (1903),  75  Vt.  406,  56  Atl.  91. 

lOSternfels  v.  Watson  (1905),  139  Fed.  505. 

URogers  v.  Rogers  (1888),  111  N.  Y.  228,  18  N.  E.  636;  Chris- 
tian v.  Worsham  (1883),  78  Va.  100;  In  re.  Stevenson  (1898),  186 
Pa.  262,  40  Art.  473.  See  also  Townsend  v.  Wilson  (1904),  77  Conn. 
411,  59  Atl.  417. 

271 


§    170.]  AMENDMENTS.  [CHAP.    XX. 

§  170.  Amending  Trust  Agreements. — To  amend  a  trust 
agreement  means,  that  the  trust  continues  under  the  original 
agreement  for  the  term  therein  fixed.  Therefore  all  provisions 
for  amendment  contemplate  that  the  essential  rights  of  the 
equitable  owners  remain  unimpaired.  The  fact,  that  amend- 
ments require  for  their  adoption  a  proportion  of  the  votes  of 
the  entire  number,  instead  of  the  entire  number,  implies  this 
kind  of  construction.  The  most  numerous  of  cases  presenting 
illustrations  of  this  are  those  which  concern  fraternal  insurance 
societies,  whose  constitutions  and  by-laws,  applications  for  in- 
surance and  benefit  certificates  are  conditioned  upon  an  assured 
being  bound  as  such  constitutions  and  by-laws  exist  or  may  be 
amended  thereafter.  This  broad  language  has  been  held  not  to 
extend  beyond  reasonable  amendments  which  pertain  to  the 
management  of  these  societies  and  not  as  impairing  the  contract 
of  the  assured.12  What  are  the  inherent  rights  of  a  cestui  que 
trust  as  distinguished  from  mere  management  of  the  business  of 
the  trust  estate  ought  to  be  easily  recognized.  There  are  the 
property  right  and  the  right  of  full  and  free  disclosure  by  the 
trustee  and  the  equitable  rule  that,  while  the  trustee  may  bar- 
gain with  the  cestui  que  trust  he  can  take  no  advantage  of  him 
by  misrepresentation  or  any  concealment  of  what  it  is  his  inter- 
est to  be  informed,  and  that  by  amendment  no  rule  of  law  in  the 
formation  or  continuance  of  the  trust  shall  be  violated. 

§  171.  Voluntary  Termination  of  a  Trust  Estate. — It  is 
considered  that  it  is  not  further  necessary  to  speak  of  what  steps 
should  be  taken  in  the  event  a  trust  estate  becomes  insolvent,  as 
the  cases  discussed  show,  that  a  court  of  equity  will  take  charge 
of  its  assets  and  distribute  them  equitably  and  proportionally 
among  creditors  and  dispose  of  any  surplus  among  its  equitable 
owners. 

12Lange  v.  Royal  Highlanders  (1905),  75  Neb.  188,  106  N.  W. 
224,  10  L.  R.  A.  (N.  S.)  666,  121  Am.  St.  Rep.  786;  O'Neill  v.  Sup. 
Council  A.  L.  H.  (1904),  70  N.  J.  L.  410,  57  Atl.  463;  Bragaw  v. 
Sup.  Lodge  K.  &  L.  H.  (1901),  128  N.  C.  354,  38  S.  ;E.  905,  54  L. 
R.  A.  602;  Thibert  v.  Sup.  Lodge  K.  H.  (1899),  78  Minn.  448, 
81  N.  W.  220,  47  L.  R.  A.  136,  79  Am.  St.  Rep.  412. 
272 


CHAP.    XX.]  TERMINATION    OF    TRUST.  (§    171. 

Therefore  it  is  intended  here  to  refer  merely  to  the  termina- 
tion of  the  trust.  We  have  seen  that  an  express  trust  may  have 
a  term  and  for  its  validity  that  term  should  be  stated  to  be  one 
within  a  time  not  forbidden  by  statute.  This,  however,  does  not 
require  that  it  can  not  be  terminated  earlier.  And  when  a  trust 
is  terminated  this  does  not  mean  that  immediately  the  entire  re- 
lation of  trustee  and  cestui  que  trust  is  at  an  end,  but  it  continues 
until  a  final  settlement  is  had.13  It  is  conceived,  therefore,  that 
it  would  not  be  in  violation  of  the  rule  against  perpetuities  for 
the  trust  instrument  to  provide  that  upon  the  termination  of  the 
trust,  the  assets  thereof  shall  be  forthwith  converted  into  money 
and  the  proceeds  distributed  among  the  then  existing  sharehold- 
ers at  the  earliest  practicable  moment.  This  question,  however, 
could  be  wholly  avoided  in  those  states  where  trust  terms  may 
be  stated  to  be  upon  a  certain  number  of  years,  New  York  and 
a  few  other  states  being  exceptions  where  a  life  or  lives  fixes 
the  duration.  However  it  is  so  repugnant  to  every  sense  of 
justice  to  suppose  that  a  trustee  would  not  have  to  account  after 
the  trust  term  had  ended,  that  there  can  be  no  plausible  claim 
to  that  effect.  Where  there  exists  at  all  times  full  power  of 
revocation,  we  have  seen  that  the  rule  against  perpetuities  is  not 
offended,  if  no  trust  term  is  stated.  13a 

Trust  instruments  of  the  character  considered  in  this  work 
should  contain  provisions  for  the  trust  term  being  cut  off  by 
action  taken  by  the  cestuis  que  trust,  should  they  so  desire.  This 
may  be  done  by  its  being  provided,  that  a  certain  proportion  of 
the  holders  of  shares  may  at  a  regular  or  special  meeting,  called 
upon  a  specified  kind  of  notice,  by  resolution  declare  that  the 
trust  shall  terminate  and  its  affairs  be  disposed  of  by  a  certain 
date,  or  as  soon  thereafter  as  may  be  practicable.131* 


v.  Bowdrie  (1900),  110  Ga.  549,  36  S.  E.  89;  Tabernacle 
Baptist  Church  v.  Fifth  Ave.  Baptist  Church  (1901),  60  N.  Y.  App. 
Div.  327,  70  N.  Y.  Supp.  181;  same  case,  172  N.  Y.  598,  64  N.  E.  1126. 
13a§  92. 

ISbHowe  v.  Morse,  174  Mass.  491,  55  N.  E.  213. 

273 


§    172.]  RECORDING   TRUST    INSTRUMENT.  [CHAP.    XX. 

Provisions  for  continuance  of  a  stated  trust  term  have  been 
discussed  in  §§  96  and  97,  ante.  Under  the  view  that  the  trusts 
created  by  the  instruments,  of  which  copies  appear  in  appendix 
to  this  volume,  are  not  subject  to  the  rule  against  restraints  upon 
alienation,  the  provisions  for  continuance  found  therein  would 
seem  to  be  valid.  To  such  however,  as  may  be  of  a  contrary 
view  and  deem  those  trusts  subject  to  such  rule,  the  writer  is 
disposed  to  advise  the  omission  of  any  clause,  providing  for  the 
continuance  of  the  trust  after  the  period  fixed  and  upon  con- 
sent of  a  part  only  of  the  cestuis. 

§  172.  Recording. — Actual  and  Constructive  Notice. — "Gen- 
erally the  provisions  for  recording  deeds  apply  to  instruments 
creating  a  trust."14  Massachusetts,  however,  has  an  additional 
provision  applicable  to  "voluntary  associations  under  written 
instrument  or  declaration  of  trust"  requiring  the  filing  of  the 
deed  of  trust  with  the  commissioner  of  corporations,15  and  "with 
the  clerk  of  every  city  or  town  in  which  such  association  has  a 
usual  place  of  business."15  The  recording  of  fictitious  names 
assumed  by  trustees  as  a  business  title  is  also  provided  for  in 
that  state.16 

It  is  not  contemplated,  however,  that  the  recording  of  the 
constating  instrument  of -a  trust  estate  in  business,  will  operate 
as  constructive  notice  that  liabilities  are  limited.  Actual  notice 
is  provided  for. 

It  is  submitted  that  those  who  establish  a  trust  estate  should 
welcome  the  opportunity  of  placing  the  instrument  where  it  may 
be  freely  inspected  by  those  interested.  Merely  keeping  the  orig- 
inal on  file  in  the  company's  office,  without  official  recording, 
should  this  be  permissible  in  any  state,  might  give  some  color  to 
a  possible  claim  that  those  in  control  as  trustees  were  not  per- 
mitting free  access  thereto.  Moreover,  official  recording  per- 
mits the  securing  of  certified  copies,  with  a  consequent  import 

l^Stimson's  American   Statute   Law,   §   1711. 
iSActs  of  Mass.  1909,  Ch.  441.     Statute  1907,  Chapter  539. 
l6Acts  of  Mass.  1907,  Chap.  539. 
274 


CHAP.    XX.]  RECORDING.  [§    172. 

of  verity,  and  forestalls  any  serious  difficulties  arising  from  loss 
of  the  original.  Besides,  recording  affords  an  easy  and  conven- 
ient mode  of  reference  to  the  trust  instrument  as  to  stipulations 
by  a  trustee  exempting  himself  from  personal  liability  and  making 
the  trust  estate  solely  responsible  for  his  contracts.  In  such  case 
it  becomes  the  duty  of  the  creditor  to  inform  himself  of  the 
powers  of  the  trustee.17 


"Bank  of  Topeka  v.  Eaton   (1900),  100  Fed.  8. 

275 


APPENDIX  OF  EXHIBITS. 

One  of  the  thoughts  upon  which  the  writer  has  endeavored 
to  lay  some  stress  in  the  foregoing  pages  is  that  provisions  in 
trust  instruments  for  the  carrying  on  of  business  are,  after  the 
trust  estate  is  provided  for,  susceptible  of  the  widest  diversity. 
Corporate  articles  are  stretched  upon  a  Procrustean  bed,  which 
a  legislature  only  may  lengthen  or  lop  off.  The  truth  of  these 
statements  is  in  the  logic  of  a  corporation  being  an  artificial 
being  and  in  the  trust  being  a  natural  person's  right  of  contract. 

The  variety  of  trust  arrangements,  which  appear  in  copies  of 
original  agreements,  which  in  this  appendix  are  called  "Exhibits", 
are  therefore  not  to  be  used  as  forms,  in  the  popular  import  of 
that  word,  but  rather  as  guides,  to  prevent  omission  in  what 
ought  to  be  embraced  in  such  an  instrument  and  as  suggestions 
in  phraseology  to  accomplish  a  desired  end.  But  they  may  no 
more  be  slavishly  followed  than  might  the  terms  in  a  particular 
contract  when  a  different  purpose  is  in  view  or  different  means 
are  preferred  for  its  performance.  As  important  contracts  need 
skill  in  their  drafting,  so  does  this  character  of  instrument. 

Nevertheless  these  precedents  should  be  of  great  value,  be- 
cause they  are  supposedly  the  result  of  mature  consideration,  as, 
in  a  sense,  pioneers  in  their  method  of  aggregating  small  in- 
vestments to  be  employed  after  the  manner  of  corporations.  We 
say  these  exhibits  are  pioneers,  but  it  is  submitted  that  the  prin- 
ciples they  are  based  on  are  not  only  old  but  they  have  con- 
stitutional guaranties  behind  them. 

It  will  be  interesting  to  study  the  variety  of  provisions  in 
these  exhibits  and  admire  the  expansibility  of  the  principles  upon 
which  they  are  based,  if  it  is  true  that  they  are  not  inconsistent 
with  these  principles,  in  fact,  or  as  developed  in  the  pages  of 

277 


EXPLANATION  OF  EXHIBITS. 

this  work.  It  also  may  be  suggested  that  as  litigation  hereafter 
may  challenge  the  validity  or  construction  of  any  terms  or  pro- 
visions of  any  of  these  instruments,  opportunity  to  consult  them 
in  their  entirety  and  compare  them  with  each  other  might  not 
be  amiss.  Particular  provisions  may  be  located  by  means  of 
the  index  at  the  end  of  the  book. 


278 


FORM  OF  DECLARATION  OF  TRUST  ESTABLISHING  A  REAL  ESTATE 

COMPANY. 

AN  AGREEMENT  AND  DECLARATION  OF  TRUST 
made  by  the  subscribers,  this  14th  day  of  April,  1894,  for  the 
purpose  of  purchasing  certain  real  estate  known  as  the  Tre- 
mont  House  Estate  and  an  adjoining  property  situated  on  Tre- 
mont  and  Beacon  Streets  and  Tremont  Place,  in  Boston. 

1.  The  trustees  under  this  agreement  are  authorized  as  such 
trustees  to  purchase  said  estates  and  any  existing  leases  thereto, 
and  to  proceed  to  the  erection  of  a  new  building  as  soon  as 
practicable,  and  may  as  such  trustees  make  all  necessary  con- 
tracts and  agreements  for  such  purchase  and  for  such  new  build- 
ing, including  any  agreement  they  may  think  advisable  for 
straightening  or  altering  boundaries,  and  may  if  they  deem 
expedient  for  the  adjustment  of  boundaries  acquire  additional 
adjoining  estates  or  release  portions  of  the  trust  estate,  and 
may  make  leases  of  the  property  or  any  part  thereof  held  by 
them  on  such  terms  as  they  may  think  best,  but  they  shall 
make  no  lease  for  a  term  of  more  than  five  years  or  for  an 
annual  rent  of  more  than  $10,000,  unless  authorized  by  vote  of 
the  shareholders,  except  that  they  may  make  a  lease  of  certain 
portions  of  said  building  to  one  tenant  for  the  term  of  not  more 
than  twenty  years  and  at  an  annual  rental  of  not  less  than 
$24,500.  After  the  new  building  is  completed  the  trustees  shall 
incur  no  debt  or  liability  except  such  as  may  be  incidental  to 
the  management  of  the  property  held  by  them,  and  then  only 
for  an  amount  not  exceeding  in  the  aggregate  at  any  one  time 
$20,000.  The  trustees  shall  have  no  power  to  bind  the  share- 
holders personally  (and  in  every  written  contract  they  shall 
enter  into  reference  shall  be  made  to  this  declaration  of  trust), 
and  the  person  or  corporation  contracting  with  the  trustees  shall 

279 


EXHIBITS. 

look  to  the  funds  and  property  of  the  trust  for  the  payment 
under  such  contract  or  for  the  payment  of  any  debt,  mortgage, 
judgment,  or  decree,  or  of  any  money  that  may  otherwise  be- 
come due  or  payable  by  reason  of  the  failure  on  the  part  of  said 
trustees  to  perform  such  contracts  in  whole  or  any  part,  and 
neither  the  trustees  nor  the  shareholders  present  or  future  in 
this  company  shall  be  personally  liable  therefor. 

2.  The  title  of  the  trustees  shall  be  "Trustees  of  the  Tre- 
mont    Building,"   and    any    property   conveyed   to   them    under 
that  description  shall  be  held  by  them  in  trust  under  this  agree- 
ment. 

3.  The  trustees  shall  give  receipts  for  installments  on  sub- 
scriptions when  paid,  and  on  the  payment  of  the  last  installment 
shall  issue  certificates  in  exchange  for  such  receipts  in  shares 
of  $100.00  each  for  each  $100.00  paid.     Such  receipts  and  cer- 
tificates shall  be  transferable  only  on  the  books  of  the  trustees 
upon  surrender  thereof,  all  installments   due  having  first  been 
paid  and  the  acceptance  of  a  receipt  or  certificate  shall  make 
the  person  named  therein  a  party  to  this  agreement.     The  term 
"shareholder"    used    in   this   agreement    shall    mean    holder   of 
record  of  a  receipt  or  a  certificate. 

4.  Interest  at  the  rate  of  4  per  cent  per  annum  and  all  taxes 
and  assessments  shall  be  added  to  the  cost  of  the  building  and 
paid   semi-annually  to  the  subscribers   from  the  date  of  their 
respective  payments  of  subscriptions  until  the  substantial  com- 
pletion of  said  building.     The  cost  of  said  building  shall  also 
include  1  per  cent  on  the  amount  of  subscriptions  procured  by 
Alexander  S.  Porter  and  T.  Dennie  Boardman  (which  shall  be 
paid  to  them  for  their  services  and  expenses  in  promoting  this 
enterprise  and  procuring  subscriptions  to  this  agreement)   and 
also  1  per  cent  on  the  gross  amount  of  rental  on   any   lease 
negotiated  by  them  of  the  lower  floor  and  basement  of  said  build- 
ing, and  also  a  reasonable  compensation  to  be  paid  the  trustees 
for  their  services  rendered  during  construction 

280 


REAL    ESTATE    TRUST. 

5.  The  trustees  shall  have  a  reasonable  compensation  after 
construction  of  building,  and  shall  make  such  dividends  among 
the  shareholders  as  they  may  deem  expedient. 

6.  The  trustees  shall  call  meetings  of  the  shareholders  an- 
nually on  the  third  Wednesday  of  March,  and  shall  report  their 
receipts  and  expenses  for  the  year  ending  on  the  31st  of  January 
preceding.     They  may  call  special  meetings  of  the  shareholders 
at  any  time,  and  shall  do  so  upon  the  written  request  of  the 
holders  of  one-twentieth  of  the  shares. 

7.  Notices  of  meetings,  of  calls  for  payments  of  subscriptions, 
or  for  any  other  purpose,  shall  be  deemed  binding  upon  each 
subscriber  and  shareholder  if  mailed  prepaid  to  the  last  address 
given  by  him  to  the  trustees,  or  in  default  thereof,  to  his  last 
given  place  of  business  or  abode.     Notices  of  meetings  shall  be 
given  seven  days  beforehand,  and  may  be  given  by  advertise- 
ment for  three  successive  days  in  two  daily  papers  published 
in  said  Boston,  or  by  mail,  at  the  option  of  the  trustees.     In 
notices  of  special  meetings  the  purpose  therefor  shall  be  stated. 

8-  Shareholders  may  vote  by  proxy.  At  any  annual  meeting 
or  special  meeting  called  for  the  purpose  the  holders  of  a  majority 
of  the  entire  number  of  shares  may  fill  any  vacancy  existing  in 
the  number  of  trustees,  may  depose  any  or  all  of  the  trustees 
and  elect  others  in  their  place,  may  authorize  a  sale  or  mort- 
gage of  the  real  estate  or  any  part  thereof  held  by  trustees,  and 
may  alter  or  amend  this  agreement.  For  all  other  purposes  a 
majority  of  those  shareholders  present  may  decide  at  such  meet- 
ings, and  ten  shareholders  or  their  proxies  representing  one- 
fifth  of  all  the  shares  shall  constitute  a  quorum.  No  such  altera- 
tion or  amendment  of  this  agreement  or  deposition  or  appoint- 
ment of  trustee  shall  affect  any  person  not  having  actual  notice 
thereof  until  recorded  in  Registry  of  Deeds  for  Suffolk  County, 
nor  shall  any  such  alteration  or  amendment  or  other  action  affect 
rights  (previously  acquired)  of  any  third  person.  A  certificate 
signed  by  the  chairman  of  such  meeting  shall,  if  countersigned 
by  at  least  one  of  the  trustees,  be  conclusive  evidence  of  the 
regularity,  of  the  meeting  and  of  the  vote  having  been  passed 

281 


EXHIBITS. 

by  the  requisite  majority  and  of  all  facts  stated  in  such  vote  or 
certificate  material  to  title. 

9.  Any  vacancy   in  the   number   of   trustees   may    be   fi"ed 
by  the  remaining  trustee  until  the  next  annual  meeting  of  the 
shareholders  or  special  meeting  called  for  the  purpose  of  filling 
such  vacancy-    The  acting  trustee  or  trustees  from  time  to  time 
shall  have  all  the  powers  of  original  trustees.    Upon  resignation, 
decease,  incapacity,  or  removal,  or  vacancy  for  any  cause,  the 
title  of  the  outgoing  trustee  shall  rest  in  the  remaining  trustee, 
and   upon  the   filling  of  any   vacancy   by  the   shareholders  as 
aforesaid  the  title  of  the  whole  trust  property  shall  rest  in  the 
new  board  jointly. 

10.  No  sale  or  mortgage  of  the   real  estate  held    by    the 
trustees,   or  any   part  thereof,   shall  be  made  by  them  unless 
authorized  by  vote  of  the  shareholders  as  provided  above,  except 
that  the  trustees  may  sell  all  the  trust  property  at  the  expiration 
of  the  trust  in  default  of  action  relative  therto  by  the  share- 
holders. 

11.  This  trust  shall  not  continue  in  any  event  longer  than 
twenty  years  after  the  death  of  the   Last  surviving  subscriber 
hereto.     The  trustees  shall  not  be  required  to  give  bond,  and 
each  shall  be  liable  only  for  his  own  acts,  and  then  only  for 
wilful  breach  of  trust. 

12.  Any  certificate  or  paper  signed  by  the  trustees  or  any 
of  them  or  by  the  shareholders,  or  a  copy  of  the  record  of  any 
of  their  proceedings  certified  by  any  one  of  the  trustees  which  it 
may  be  deemed  desirable  to  record  in  the  Registry  of  Deeds 
for  the  County  of  Suffolk,  may  be  acknowledged  by  any  one  of 
the   trustees  or  parties   signing  in   the  manner   prescribed   for 
the  acknowledgment  of  deeds  in  Massachusetts. 

13.  We   the   subscribers   agree   to   pay   to   the   trustees   the 
amounts  stated  against  our  names,  in  such  sums  and  at  such 
times  as  the  trustees  may  require,  and  in  case  any  subscriber 
neglects   to   pay  any   installment    required   by   the   trustees    in 

282 


REAL    ESTATE    TRUST. 

twenty  days  after  notice,  the  amount  of  his  subscription  then 
unpaid  may  be  canceled  at  the  option  of  the  trustees,  who  may 
accept  another  subscriber  in  his  place. 

14.  The  limit  of  subscriptions  hereto  shall  be  the  sum   of 
$2,700,000,  and  no  subscription  shall  be  binding  until  the  total 
amount   reaches  the  sum  of  $1,400,000.      It  being  understood 
that  the  remaining  $1,300,000  is  to  be  raised  by  a  mortgage 
of  the  said  real  estate. 

15.  The  first  trustees  under  this  agreement  shall  be  Charles 
E.   Getting  and   Francis  C  Welch,  both  of   said  Boston,   who 
signify  their  acceptance  of  the  trust  by  subscribing  their  names 
thereto.     No  surety  or  sureties  shall  have  to  be  required   of 
any  trustee  acting  hereunder. 

CHARLES  E.  COTTING, 
FRANCIS  C.   WELCH, 

Trustees. 

Name.  Amount-          Name.  Amount. 

Estate   of    Fred     L. 

Ames,    by    Oliver 

Ames  2d,    Samuel 

Carr,  Exca $200,000  H.  H.  Hunnewell. .  .$200,000 

B.  P.  Cheney,  By  B.  Henry  Lee 100,000 

P.  Cheney,  Jr.,  At-  David  Sears 50,000 

torney  200,000  Grant  Walker 60,000 

Etc.,  etc. 

I,  Andrew  C.  Wheelwright,  hereby  certify  that  I  was  the 
Chairman  of  a  Special  Meeting  of  the  shareholders  of  the 
Tremont  Building  Trust  under  an  Agreement  and  Declaration 
of  Trust  made  April  14th,  1894,  and  recorded  with  Suffolk 
Deeds,  lib.  2212,  Page  210,  duly  called  for  the  purpose  and 
held  at  Boston  on  Tuesday  the  fifth  day  of  March,  A.  D. 
1901,  and  that  at  said  meeting  the  holders  of  a  majority  of  the 
entire  number  of  shares  passed  the  following  vote,  amending 
said  Agreement  and  Declaration  of  Trust. 

283 


EXHIBITS. 

VOTED:  That  the  Agreement  and  Declaration  of 
Trust  dated  April  14th,  1894,  and  recorded  with  Suf- 
folk Deeds,  lib.  2212,  Page  210,  be  and  the  same 
hereby  is  altered  and  amended  as  follows :  The  Trustees 
under  said  agreement  are  authorized  to  purchase  the 
estate  on  the  westerly  corner  of  Beacon  Street  and 
Tremont  Place,  in  Boston,  now  belonging  to  Walter  J. 
Otis  and  numbered  six  on  said  Beacon  Street,  and  one 
and  three  on  said  Tremont  Place,  also  the  adjoining 
estate  on  said  Tremont  Place  now  belonging  to  Isidore 
B.  Raggiotti  and  numbered  five  on  said  Tremont  Place, 
containing  together  about  four  thousand,  eight  hundred 
and  sixty-five  square  feet,  and  any  existing  leases  and 
mortgages  thereon,  and  to  proceed  to  erect  thereon  a 
"building  of  the  first  class,"  said  real  estate  when  so 
purchased  to  be  held  by  the  said  trustees  upon  the 
trusts  set  forth  in  said  agreement  and  with  the  same 
powers  in  all  respects  as  if  the  same  had  been  included 
within  the  scope  of  the  original  trust,  and  upon  the 
completion  of  such  building  or  .at  any  time  thereafter 
said  trustees  are  authorized  to  issue  from  time  to  time 
such  additional  stock  on  such  terms  as  to  them  shall 
seem  best  to  pay  for  said  land,  the  cancellation  of  leases 
and  mortgages  and  the  construction  of  such  building  and 
any  incidental  expenses  connected  therewith. 

I  further  certify  that  at  said  meeting  the  holders  of  a  majority 
of  the  entire  number  of  shares  passed  the  following  vote: 

VOTED:  To  provide  means  of  paying  for  the  land 
situated  on  the  westerly  corner  of  Beacon  Street  and 
Tremont  Place,  numbered  six  on  Beacon  Street  and 
one,  three,  and  five  on  Tremont  Place,  containing  to- 
gether about  four  thousand,  eight  hundred  and  sixty- 
five  square  feet,  the  cancellation  of  leases,  the  discharge 
of  mortgages,  and  the  erection  of  a  building  thereon; 
the  trustees  are  authorized  to  borrow  from  time  to  time 
such  money  as  in  their  opinion  is  necessary  for  those 
purposes,  and  to  give  the  notes  or  obligations  of  the 

284 


TRUST   AMENDMENT. 

trustees  therefor  on  such  time  and  bearing  interest  at 
such  rate  as  to  the  trustees  shall  seem  best,  which  notes 
shall  be  enforceable  against  any  property  now  or  here- 
after held  under  the  agreement  of  trust,  and  to  secure 
payment  for  such  notes  or  obligations  by  giving  a 
power  of  sale,  mortgage  or  mortgages  in  such  form  as 
they  may  deem  expedient  covering  said  land  and  build- 
ings. No  mortgagee,  however,  to  be  under  any  obliga- 
tion to  see  to  the  application  of  the  money  lent. 
Witness  my  hand  this  30th  day  of  March,  A.  D.  1901. 

ANDREW  C.  WHEELWRIGHT. 
Countersigned : — 
CHARLES  E.  COTTING, 
FRANCIS  C.  WELCH, 

Trustees  of  Tremont  Building, 

Under  an  Agreement  and  Declaration  of 
Trust  made  April  14th,  1894,  and  re- 
corded with  Suffolk  Deeds,  lib.  2212, 
Page  210. 

Commonwealth  of  Massachusetts,  "» 
Suffolk.  /  S 

Then  personally  appeared  the  above  named  Charles  E.  Cot- 
ting  and  Francis  C.  Welch,  and  acknowledged  the  foregoing 
instrument  by  them  subscribed  to  be  their  free  act  and  deed  as 
Trustees. 

Before  me,  ERNEST  DANE, 

Recorded : —  Justice  of  the  Peace. 

April  2d,  1901,  one  o'clock  and 
twenty-eight  minutes  P.  M. 


285 


FORM   OF  DECLARATION   OF  TRUST   ESTABLISHING  A   HOLDING 

COMPANY. 

Agreement  and 
Declaration  of  Trust  of  the 

MASSACHUSETTS  ELECTRIC  COMPANIES. 
Dated:  June  29th,  1899. 

THIS  AGREEMENT,  made  this  twenty-ninth  day  of  June, 
A.  D.  1899,  by  and  between  E.  Rollins  Morse,  Henry  Russell 
Shaw,  Robert  W.  Emmons,  2d,  and  George  W.  Parker,  co- 
partners under  the  firm  name  of  E.  Rollins  Morse  and  Brother, 
and  William  A.  Tucker,  S.  Reed  Anthony,  Philip  L.  Saltonstall 
and  Nathan  Anthony,  co-partners  under  the  firm  name  of 
Tucker,  Anthony  and  Company,  together  with  their  assigns, 
herein  designated  as  the  "SUBSCRIBERS,"  and  Gordon  Ab- 
bott, Charles  Francis  Adams,  2d,  S.  Reed  Anthony,  John  N- 
Beckley,  Amos  F.  Breed,  Everett  W.  Burdett,  Charles  E.  Cot- 
ting,  Eugene  N.  Foss,  Walter  Hunnewell,  Stillman  F.  Kelley, 
E.  Rollins  Morse,  Richard  Olney,  Percy  Parker,  S.  Endicott 
Peabody,  and  Philip  L.  Saltonstall,  together  with  their  succes- 
sors, herein  designated  as  the  "TRUSTEES,"  witnesseth: 

That 

WHEREAS  the  subscribers  propose  to  transfer,  assign,  and 
deliver  to  the  Trustees,  under  the  designation  of  "MASSA- 
CHUSETTS ELECTRIC  COMPANIES,"  certain  shares  of 
the  capital  stock  and  other  securities  of  sundry  street  railways 
and  other  companies  and  contracts  to  purchase  the  same  and 
also  other  property,  as  shown  in  a  schedule  identified  by  the 
signatures  of  the  parties  hereto  and  filed  with  the  Trustees; 
and  the  Trustees  for  the  purpose  of  defining  the  interests  of 
the  subscribers  and  their  assigns  in  such  property,  have  agreed 
286 


HOLDING    TRUST. 

to  issue  to  the  Subscribers  negotiable  certificates  for  two 
hundred  and  forty  thousand  (240,000)  shares,  of  which  one 
hundred  and  twenty  thousand  (120,000)  shall  be  preferred  and 
one  hundred  and  twenty  thousand  (120,000)  shall  be  common, 
each  share  to  be  expressed  of  the  par  value  of  one  hundred  (100) 
dollars,  and  all  of  said  shares  to  be  issued  to  the  Subscribers 
in  the  following  proportions,  viz: 

To  said  E.  Rollins  Morse  and  Brother,  or  order,  60,000  pre- 
ferred shares  and  60,000  common  shares;  to  said  Tucker,  An- 
thony &  Company,  or  order,  60,000  preferred  shares  and  60,000 
common  shares. 

NOW,  THEREFORE,  the  Trustees  hereby  declare  that  they 
will  hold  said  property  so  to  be  transferred  to  them,  as  well 
as  all  other  property  which  they  may  acquire  as  such  Trustees, 
together  with  the  proceeds  thereof,  in  trust,  to  manage  and  dis- 
pose of  the  same  for  the  benefit  of  the  holders  from  time  to 
time,  of  the  certificates  of  shares  issued  hereunder,  according 
to  the  priorities  expressed  in  said  certificates,  and  in  the  man- 
ner and  subject  to  the  stipulations  herein  contained,  to-wit: 

FIRST.  The  Trustees,  in  their  collective  capacity,  shall  be 
designated,  so  far  as  practicable,  as  the  "MASSACHUSETTS 
ELECTRIC  COMPANIES,"  and  under  that  name  shall,  so 
far  as  practicable,  conduct  all  business  and  execute  all  instru- 
ments in  writing,  in  performance  of  their  trust. 

SECOND.  The  Trustees  shall  always  be  fifteen  in  number, 
and  of  the  Trustees  herein  mentioned  by  name,  S.  Reed  An- 
thony, Everett  W-  Burdett,  E.  Rollins  Morse,  S.  Endicott  Pea- 
body,  and  Philip  L.  Saltonstall,  shall  hold  office  until  the  first 
annual  meeting  of  the  shareholders;  Gordon  Abbott,  John  N. 
Beckley,  Amos  F.  Breed,  Walter  Hunnewell,  and  Stillman  F. 
Kelley,  shall  hold  office  until  the  second  annual  meeting  of 
the  shareholders;  and  Charles  Francis  Adams,  2d,  Charles  E. 
Getting,  Eugene  N.  Foss,  Richard  Olney,  and  Percy  Parker, 
shall  hold  office  until  the  third  annual  meeting  of  the  share- 
holders; except  that  said  Trustees,  as  well  as  any  Trustees 

287 


EXHIBITS. 

hereafter  elected,  shall  in  all  cases  hold  office  until  their  suc- 
cessors have  been  elected  and  accepted  this  trust. 

The  shareholders  shall,  at  each  annual  meeting,  or  adjourn- 
ment thereof,  elect  five  Trustees  to  serve  for  the  term  of  three 
years  next  ensuing.  In  case  of  death,  resignation,  or  inability 
to  act  of  any  of  said  Trustees,  the  remaining  Trustees  shall 
accept  any  resignation  and  fill  any  vacancy  for  the  unexpired 
term.  As  soon  as  any  Trustees  elected  by  the  shareholders  or 
by  the  remaining  Trustees  to  fill  a  vacancy  have  accepted  this 
trust,  the  trust  estate  shall  rest  in  the  new  Trustees  or  Trustee, 
together  with  the  continuing  Trustees,  without  any  furher  act 
or  conveyance. 

THIRD.  The  Trustees  shall  hold  the  legal  title  to  all  prop- 
erty at  any  times  belonging  to  their  trust,  and  shall  have  and 
exercise  the  exclusive  management  and  control  of  the  same ; 
they  shall  assume  all  contracts  for  and  obligations  and  liabilities 
in  connection  with  or  growing  out  of  the  purchase  of  the  stock 
or  securities  assigned  to  them  by  the  Subscribers  and  men- 
tioned in  the  annexed  schedule,  and  to  the  extent  and  value 
of  such  stock  and  securities,  but  not  personally,  shall  agree  to 
hold  the  Subscribers  and  any  person  associated  or  acting  with 
them  harmless  and  indemnified  from  and  against  any  loss,  cost, 
expense,  or  liability  upon,  by  reason  of,  or  in  connection  with, 
any  such  contract,  obligation  or  liability;  they  may  adopt  and 
use  a  common  seal;  they  shall  have  power  to  vote  in  person  or 
by  proxy  upon  all  shares  of  stock  at  any  time  belonging  to 
the  trust,  and  to  collect,  receive,  and  receipt  for  the  dividends 
thereon,  and  may  contract  with  each  or '  any  of  the  controlled 
companies  in  respect  of  any  matter  or  matters  relating  to  the 
operation  of  the  road  or  the  conduct  of  the  business  of  any 
such  company  or  companies,  to  collect,  sue  for,  receive  and 
receipt  for  all  sums  of  money  at  any  time  coming  due  to  said 
trust;  to  employ  counsel  to  begin,  prosecute,  defend  and  settle 
suits  at  law,  in  equity  or  otherwise,  and  to  compromise  or  refer 
to  arbitration  any  claims  in  favor  of  or  against  the  trust;  they 
may  also,  with  the  consent  of  not  less  than  ten  of  their  number 
288 


HOLDING    TRUST. 

given  at  a  meeting  called  for  that  purpose,  but  not  otherwise, 
exchange,  upon  such  terms  as  may  be  agreed  upon,  the  stock 
or  securities  held  by  them  in  any  corporation  for  the  stock  or 
securities  of  any  other  corporation,  taking  over  the  property 
of  such  corporation  by  consolidation  or  otherwise;  and  with 
such  consent  but  not  otherwise,  may  loan  money  to  any  cor- 
poration of  which  they  may  own  a  majority  of  the  capital  stock, 
and  may  subscribe  for  or  acquire  additional  stock  or  the  securi- 
ties or  obligations  of  such  corporations;  and  with  such  consent, 
but  not  otherwise,  may  subscribe  for,  purchase,  and  acquire 
shares  in  the  capital  stock  of  any  corporation  (1)  owning  or 
operating  railways  or  railroads,  or  engaged  in  the  business  of 
transporting  merchandise,  mails  or  express  matter,  or  (2)  en- 
gaged in  whole  or  in  part  in  supplying  light,  heat,  power  or  other 
public  service,  or  (3)  manufacturing,  selling  or  repairing  ma- 
chines, equipments,  supplies  or  other  articles  used  by  corpora- 
tions of  either  or  both  the  classes  above  named,  or  (4)  engaged 
in  the  business  of  insuring  corporations  of  any  or  all  of  the 
foregoing  classes  against  loss  by  fire  or  casualty,  or  (5)  en- 
gaged in  the  business  of  advertising  in  the  cars  or  upon  the 
premises  of  railways,  or  railroad  companies ;  and  with  such  con- 
sent, but  not  otherwise,  may  borrow  money  for  any  of  the  pur- 
poses aforesaid.  With  the  consent  of  the  holders  of  at  least 
two-thirds  of  each  class  of  shares  outstanding,  at  a  meeting 
called  for  that  purpose,  but  not  otherwise  except  as  herein 
otherwise  provided,  the  Trustees  may  sell,  mortgage,  pledge, 
encumber,  or  dispose  of  any  shares  or  stock  securities  or  other 
property  from  time  to  time  held  by  them  upon  such  terms  and 
for  such  purposes  as  the  shareholders  at  such  meeting  may 
approve. 

So  far  as  strangers  to  this  trust  are  concerned,  a  resolution 
of  the  Trustees  authorizing  a  particular  act  to  be  done  shall  be 
conclusive  evidence  in  favor  of  such  strangers  that  such  act  is 
within  the  powers  of  the  Trustees,  and  no  purchaser  from  the 
Trustees  shall  be  bound  to  see  the  application  of  the  purchase 
money  or  other  consideration  paid  or  delivered  by  or  for  said 
purchaser  to  or  for  said  Trustees. 

289  j 


EXHIBITS. 

FOURTH.  Stated  meetings  of  the  Trustees  shall  be  held 
at  least  once  a  month,  and  other  meetings  shall  be  held  from 
time  to  time  upon  the  call  of  the  President  or  any  three  of  the 
Trustees.  A  majority  of  the  Board  constitutes  a  quorum,  and 
the  concurrence  of  all  the  Trustees  shall  not  be  necessary  to 
the  validity  of  any  action  done  by  them,  but  the  wish  of  a  ma- 
jority of  the  Trustees  present  and  voting  at  any  meeting  shall 
be  conclusive  except  as  hereinbefore  specifically  provided.  The 
Trustees  may  make,  adopt,  amend,  or  repeal  such  by-laws, 
rules,  and  regulations,  not  inconsistent  with  the  terms  of  this 
instrument,  as  they  may  be  deemed  necessary  or  desirable  for 
the  conduct  of  their  business  and  for  the  government  of  them- 
selves and  their  agents,  servants,  and  representatives. 

FIFTH.  The  Trustees  shall  annually  elect  from  among 
their  number  a  President  and  Vice-President  of  the  Board,  and 
shall  also  annually  elect  a  Treasurer  and  Secretary,  and  they 
shall  have  authority  to  appoint  such  other  officers,  agents,  and 
attorneys  as  they  may  from  time  to  time  deem  necessary  or 
expedient  for  the  conduct  of  their  business.  They  shall  have 
authority  to  accept  resignations  and  to  fill  any  vacancy  in  the 
office  of  President,  Vice-President,  Treasurer,  or  Secretary,  for 
the  unexpired  term;  and  shall  likewise  have  authority  to  elect 
temporary  officers  to  serve  during  the  absence  or  disability  of 
regular  officers.  The  President,  Vice-President,  Treasurer,  and 
Secretary  shall  have  the  authority  and  shall  perform  the  duties 
usually  incident  to  those  offices  in  the  case  of  corporations,  so 
far  as  applicable  thereto,  and  shall  have  such  other  authority 
and  perform  such  other  duties  as  may  from  time  to  time  be 
determined  by  the  Trustees.  The  Trustees  shall  fix  the  com- 
pensation of  any,  or  all  officers  and  agents  whom  they  may 
appoint,  and  are  likewise  authorized  to  pay  to  themselves  such 
compensation  for  their  own  services  as  they  may  deem  reason- 
able. The  Trustees  shall  also  appoint  from  among  their  num- 
ber an  Executive  Committee  of  three  or  five  persons,  to  whom 
they  may  delegate  such  of  the  powers  herein  conferred  upon 
the  Trustees  as  they  may  deem  expedient,  except  so  far  as  those 
290 


HOLDING   TRUST. 

matters  are  concerned  in  which  the  concurrent  action  of  at  least 
ten  Trustees  is  required. 

The  Trustees  shall  not  be  liable  for  errors  of  judgment  either 
in  holding  property  originally  conveyed  to  them  or  in  acquiring 
and  afterward  holding  additional  property,  nor  for  any  loss 
arising  out  of  any  investment,  nor  for  any  act  or  omission  to 
act  performed  or  omitted  by  them  in  the  execution  of  this  trust 
in  good  faith,  nor  shall  they  be  liable  for  the  acts  or  omissions 
of  each  other  or  of  any  officer,  agent,  or  servant  appointed  by 
or  acting  for  them,  and  they  shall  not  be  obliged  to  give  any 
bond  to  secure  the  due  performance  of  this  trust  by  them. 

SIXTH.  Shares  hereunder  shall  be  of  the  par  value  of  one 
hundred  ($100.00)  dollars  each,  and  shall  be  divided  into  pre- 
ferred and  common  shares.  The  preferred  shares  shall  entitle 
the  holder  to  accumulative  semi-annual  dividends  at  the  rate 
of  4  per  centum  per  annum,  and  no  more,  the  same  to  be  paid 
or  set  apart  before  any  dividend  shall  be  paid  or  set  apart  for 
the  common  shares;  and  in  case  of  liquidation,  the  proceeds  of 
the  liquidation  shall  be  first  applied  to  the  payment  to  the  holder 
of  preferred  shares,  of  the  sum  of  one  hundred  dollars  per 
share  and  any  accrued  and  unpaid  dividends  thereon,  and  the 
balance  remaining  thereafter  shall  be  divided  among  the  holders 
of  common  shares  in  proportion  to  their  holdings.  As  evidence 
of  the  ownership  of  said  shares,  the  Trustees  shall  cause  to  be 
issued  to  each  shareholder  a  negotiable  certificate  or  certificates, 
which  certificates  shall  be  in  form  following,  to-wit: 

(FORM  OF  CERTIFICATE  OF  COMMON  STOCK.) 

MASSACHUSETTS   ELECTRIC   COMPANIES. 

No.  Shares. 

Not  subject  to  assessment. 
This  certifies  that 

is  the  holder  of  common  shares  in  the 

MASSACHUSETTS  ELECTRIC  COMPANIES,    which    he 

291 


EXHIBITS. 

holds  subject  to  an  Agreement  and  Declaration  of  Trust,  dated 
June  29,  1899,  and  on  file  with  the  Old  Colony  Trust  Company, 
which  is  hereby  referred  to  and  made  a  part  of  this  certificate. 

The  shares  in  said  Massachusetts  Electric  Companies  are 
divided  into  two  classes,  known  as  preferred  and  common,  and 
the  holders  of  the  preferred  shares  are  entitled  to  receive  semi- 
annual dividends  out  of  the  net  earnings  of  the  Companies,  at 
the  rate  of  four  per  centum  per  annum,  and  no  more,  payable 
semi-annually,  on  the  first  days  of  January  and  July  in  each 
year,  which  shall  be  paid  or  set  apart  before  any  dividends  shall 
be  paid  or  set  apart  on  the  common  shares. 

The  dividends  on  the  preferred  shares  are  cumulative,  and 
if,  in  any  period  of  six  months,  semi-annual  dividends  at  the 
rate  of  four  per  centum  per  annum  are  not  paid  on  said  pre- 
ferred shares,  the  accrued  and  unpaid  dividends  are  a  charge 
on  the  net  earnings  of  the  Companies,  payable  subsequently  be- 
fore any  dividends  are  paid  upon  the  common  shares. 

In  the  event  of  liquidation,  the  proceeds  of  liquidation  will  be 
first  applied  to  the  payment  to  the  holders  of  preferred  shares 
of  the  sum  of  one  hundred  dollars  ($100)  per  share  and  any 
accrued  and  unpaid  dividends  thereon ;  and  the  balance  remain- 
ing thereafter  will  be  divided  among  the  holders  of  common 
shares  in  proportion  to  their  holdings. 

The  holders  of  preferred  and  common  shares  are  entitled  to 
equal  voting  powers. 

This  certificate  will  not  be  valid  until  countersigned  by  the 
Old  Colony  Trust  Company,  Transfer  Agent,  and  the  American 
Trust  Company,  Agent  to  Register  Transfers;  and  no  transfer 
hereof  will  be  of  any  effect  as  regards  the  Massachusetts  Elec- 
tric Companies  until  this  certificate  has  been  surrendered  and 
the  transfer  recorded  upon  their  books. 

IN  WITNESS  WHEREOF,  the  Trustees  under  said  De- 
claration of  Trust,  herein  designated  as  the  Massachusetts  Elec- 
tric Companies,  have  caused  their  common  seal  to  be  hereto 
affixed  and  this  certificate  to  be  executed  in  their  name  and 
behalf,  by  their  Treasurer,  thereto  duly  authorized. 

292 


HOLDING    TRUST. 

MASSACHUSETTS  ELECTRIC  COMPANIES. 

By  ,  Treasurer. 

Countersigned : 

Old  Colony  Trust  Company,  Transfer  Agent. 

By Assistant  Secretary. 

By Transfer   Clerk. 

Countersigned : 

American  Trust  Company,  Agent  to  Register  Transfers. 

By Assistant  Secretary. 

(FORM   OF  TRANSFER.) 
For  value  received,  I  hereby  sell,  assign,  transfer,  and  deliver 

to  of  the  within-named 

shares  of  the  MASSACHUSETTS  ELECTRIC  COMPANIES, 
and  I  hereby  request  that  said  transfer  be  recorded  on  the 
books  of  said  Companies. 

Witness   my   hand,    this  day   of 

,   19       . 
Witness : 

(FORM  OF  CERTIFICATE  OF  PREFERRED  SHARES.) 

MASSACHUSETTS   ELECTRIC   COMPANIES. 

No.  Shares. 

Not  subject  to  assessment. 
This  certifies  that 

is  the  holder  of  preferred  shares 

293 


EXHIBITS. 

in  the  MASSACHUSETTS  ELECTRIC  COMPANIES,  which 
he  holds  subject  to  an  Agreement  and  Declaration  of  Trust,  dated 
June  29,  1899,  and  on  file  with  the  Old  Colony  Trust  Company, 
which  is  hereby  referred  to  and  made  a  part  of  this  certificate. 

The  shares  in  said  Massachusetts  Electric  Companies  are 
divided  into  two  classes,  known  as  preferred  and  common,  and 
the  holders  of  the  preferred  shares  are  entitled  to  receive  semi- 
annual dividends  out  of  the  net  earnings  of  the  Companies,  at 
the  rate  of  four  per  centum  per  annum,  and  no  more,  payable 
semi-annually,  on  the  first  days  of  January  and  July  in  each 
year,  which  shall  be  paid  or  set  apart  before  any  dividends  shall 
be  paid  or  set  apart  on  the  common  shares. 

The  dividends  on  the  preferred  shares  are  cumulative,  and  if, 
in  any  period  of  six  months,  semi-annual  dividends  at  the  rate 
of  four  per  centum  per  annum  are  not  paid  on  said  preferred 
shares,  the  accrued  and  unpaid  dividends  are  a  charge  on  the 
net  earnings  of  the  Companies,  payable  subsequently  before  any 
dividends  are  paid  upon  the  common  shares. 

In  the  event  of  liquidation,  the  proceeds  of  liquidation  will 
be  first  applied  to  the  payment  to  the  holders  of  preferred  shares 
of  the  sum  of  one  hundred  dollars  ($100)  per  share  and  any 
accrued  and  unpaid  dividends  thereon;  and  the  balance  remain- 
ing thereafter  will  be  divided  among  the  holders  of  common 
shares  in  proportion  to  their  holdings. 

The  holders  of  preferred  and  common  shares  are  entitled  to 
equal  voting  powers. 

This  certificate  will  not  be  valid  until  countersigned  by  the 
Old  Colony  Trust  Company,  Transfer  Agent,  and  the  American 
Trust  Company,  Agent  to  Register  Transfers;  and  no  transfer 
hereof  will  be  of  any  effect  as  regards  the  Massachusetts  Electric 
Companies  until  this  certificate  has  been  surrendered  and  the 
transfer  recorded  upon  their  books. 

IN  WITNESS  WHEREOF,  the  Trustees  under  said  Declar- 
ation of  Trust,  herein  designated  as  the  Massachusetts  Electric 
Companies,  have  caused  their  common  seal  to  be  hereto  affixed, 
and  this  certificate  to  be  executed  in  their  name  and  behalf,  by 
their  Treasurer,  thereto  duly  authorized. 

294 


HOLDING    TRUST. 

MASSACHUSETTS  ELECTRIC  COMPANIES. 

By ,  Treasurer. 

Countersigned : 

Old  Colony  Trust  Company,  Transfer  Agent: 

By Assistant  Secretary. 

By Transfer  Clerk. 

Countersigned : 
American  Trust  Company,  Agent  to  Register  Transfers. 

By Assistant  Secretary. 

(FORM  OF  TRANSFER.) 
For  value  received,  I  hereby  sell,  assign,  transfer  and  deliver 

to  of  the  within-named 

shares  of  the  MASSACHUSETTS  ELECTRIC  COMPANIES; 
and  I  hereby  request  that  said  transfer  be  recorded  on  the  books 
of  the  Companies. 

Witness  my  hand,  this  day  of 

19       . 
Witness : 

SEVENTH.  In  addition  to  the  shares  to  be  originally  issued 
to  the  subscribers  as  hereinbefore  provided,  the  Trustees  shall 
issue  and  sell,  at  public  or  private  sale,  upon  such  terms  and  for 
such  prices  as  they  may  deem  expedient,  such  additional  pre- 
ferred or  common  shares,  or  both,  as  may  be  necessary  to  pro- 
vide means  to  pay  for  the  stock  of  the  New  Bedford,  Middle- 
borough,  and  Brockton  Street  Railway  Company,  the  contract 

295 


EXHIBITS. 

for  the  purchase  of  which  is  to  be  assigned  to  and  assumed  by 
the  Trustees. 

Except  as  aforesaid,  no  share  shall  be  issued  by  the  Trustees 
in  excess  of  the  amount  to  be  originally  issued  to  the  Subscribers, 
as  hereinbefore  stated.  But  the  Trustees  may  from  time  to 
time,  for  the  purpose  of  acquiring  means  for  the  acquisition  of 
additional  property  or  otherwise  accomplishing  the  purpose  of 
this  trust,  with  the  consent  of  at  least  two-thirds  of  the  preferred 
stockholders  and  two-thirds  of  the  common  shareholders,  present 
and  voting,  at  any  meeting  called  for  that  purpose,  issue  and 
dispose  of  additional  shares  upon  such  terms  and  in  such  manner 
as  the  shareholders  at  such  meeting  may  determine. 

In  case  of  the  loss  or  destruction  of  any  certificates  of  shares 
issued  by  the  Trustees,  the  Trustees  may,  under  such  condition 
as  they  may  deem  expedient,  issue  a  new  certificate  or  certificates 
in  the  place  of  the  one  lost  or  destroyed. 

EIGHTH.  The  Trustees  may  from  time  to  time  declare  and 
pay  dividends  out  of  the  net  earnings  from  time  to  time  received 
by  them,  but  the  amount  of  such  dividends  and  the  payment 
of  them  shall  be  wholly  in  the  discretion  of  the  Trustees ;  except 
that  the  dividends  on  the  preferred  shares  shall  be  payable 
semi-annually  on  the  first  days  of  June  and  December  in  each 
year,  at  the  rate  of  4  per  cent  per  annum,  and  no  more,  and 
shall  be  cumulative,  and  said  semi-annual  dividends  shall  be  paid 
or  set  apart  before  any  dividends  are  paid  on  the  common 
shares. 

NINTH.  The  fiscal  year  of  the  Trustees  shall  end  on  the 
thirteenth  day  of  September  in  each  year.  Annual  meetings 
for  the  election  of  five  Trustees  and  for  the  transaction  of  other 
business,  shall  be  held  in  Boston,  on  the  Wednesday  following 
the  first  Monday  of  November,  in  each  year,  beginning  with 
the  year  1900,  of  which  meetings  notice  shall  be  given  by  the 
Secretary,  by  mail,  to  each  shareholder,  at  his  registered  ad- 
dress, at  least  ten  days  before  said  meeting. 
296 


HOLDING    TRUST. 

Special  meetings  of  the  shareholders  may  be  called  at  any 
time,  upon  seven  days'  notice  given  as  above  stated,  when  or- 
dered by  the  President  or  Trustees.  At  all  meetings  of  the 
Shareholders,  each  holder  of  shares,  whether  preferred  or  com- 
mon, shall  be  entitled  to  one  vote  for  each  share  held  by  him, 
and  any  shareholder  may  vote  by  proxy. 

No  business  shall  be  transacted  at  any  special  meeting  of 
the  shareholders  unless  notice  of  such  business  has  been  given  in 
the  call  for  the  meeting. 

No  business  except  to  adjourn  shall  be  transacted  at  any 
meeting  of  the  Shareholders  unless  the  holders  of  a  majority  of 
all  the  shares  outstanding  are  present  in  person  or  by  proxy. 

TENTH.  The  death  of  a  Shareholder  or  Trustee  during 
the  continuance  of  this  trust  shall  not  operate  to  determine  the 
trust,  nor  shall  it  entitle  the  legal  representative  of  the  deceased 
shareholder  to  an  accounting,  or  to  take  any  action  in  the  courts, 
or  elsewhere,  against  the  Trustees;  but  the  executors,  adminis- 
trators, or  assigns  of  any  deceased  shareholder  shall  succeed  to 
the  rights  of  said  decedent  under  this  trust,  upon  surrender  of 
the  certificate  for  the  shares  owned  by  him. 

The  ownership  of  shares  hereunder  shall  not  entitle  the  share- 
holders to  any  title  in  or  to  the  trust  property  whatsoever,  or 
right  to  call  for  a  partition  or  division  of  the  same,  or  for  an 
accounting.1 

ELEVENTH.  The  Trustees  shall  have  no  power  to  bind 
the  shareholders  personally,  and  the  subscribers  and  their  assigns 
and  all  persons  or  corporations  extending  credit  to,  contracting 
with,  or  having  any  claim  against  the  Trustees  shall  look  only 
to  the  funds  and  property  of  the  trust  for  payment  under  such 

iThis  author  takes  the  prohibition  of  "an  accounting"  to  mean 
an  accounting  so  far  as  title  to  trust  property  or  in  any  proceeding 
for  its  partition  or  division,  and  that  it  is  not  intended  to  debar  a 
cestui  from  any  disclosure  properly  demanded  as  this  may  be  re- 
quired so  far  as  his  interest  may  be  concerned.  For  comparison 
see  form  on  page  335.  See  also  §§  21,  135,  141,  142,  168. 

297 


EXHIBITS. 

contract  or  claim,  or  for  the  payment  of  any  debt,  damage,  judg- 
ment, or  decree,  or  of  any  money  that  may  otherwise  become  due 
or  payable  to  them  from  the  Trustees,  so  that  neither  the 
Trustees  nor  the  shareholders,  present  or  future,  shall  be  per- 
sonally liable  therefor. 

In  every  written  order,  contract,  or  obligation  which  the 
Trustees  shall  give  or  enter  into,  it  shall  be  the  duty  of  the 
Trustees  to  stipulate  that  neither  the  Trustees  nor  the  Share- 
holders shall  be  held  to  any  personal  liability  under  or  by  reason 
of  such  order,  contract,  or  obligation. 

TWELFTH.  This  trust  shall  continue  for  the  term  of 
twenty-one  years,  at  which  time  the  then  Board  of  Trustees 
shall  proceed  to  wind  up  its  affairs,  liquidate  its  assets,  and  dis- 
tribute the  same  among  the  holders  of  preferred  and  common 
shares  according  to  the  priorities  hereinbefore  expressed,  PRO- 
VIDED, HOWEVER,  that  if  prior  to  the  expiration  of  said 
period,  the  holders  of  at  least  two-thirds  of  the  shares  then 
outstanding  shall,  at  a  meeting  called  for  that  purpose,  vote  to 
terminate  or  to  continue  this  trust,  then  said  trust  shall  either 
terminate  or  continue  in  existence  for  such  further  period  as 
may  then  be  determined.1 

For  the  purpose  of  winding  up  their  affairs  and  liquidating 
the  assets  of  the  trust,  the  then  Board  of  Trustees  shall  con- 
tinue in  office  until  such  duties  have  been  fully  performed. 

This  agreement  and  declaration  of  trust  may  be  amended  or 
altered  except  as  regards  the  liabilities  of  the  Trustees  at  any 
annual  or  special  meeting  of  the  shareholders  with  the  consent 
of  the  holders  of  at  least  two-thirds  of  the  shares  of  each  class 
then  outstanding;  provided  notice  of  the  proposed  amendment 
or  alteration  shall  have  been  given  in  the  call  for  the  meeting; 
and  in  case  of  such  alteration  or  amendment,  the  same  shall 
be  attached  to  and  made  a  part  of  this  agreement,  and  a  copy 
thereof  shall  be  filed  with  the  OLD  COLONY  TRUST  COM- 
PANY. 

lAs  to  validity  or  not  of  this  proviso  see  §§  96,  97,  171. 
298 


HOLDING    TRUST. 

IN  WITNESS  WHEREOF,  the  said  Gordon  Abbott,  Charles 
Francis  Adams,  3d,  S.  Reed  Anthony,  John  N.  Beckley,  Amos 
F.  Breed,  Everett  W.  Burdett,  Charles  E.  Cotting,  Eugene  N. 
Foss,  Walter  Hunnewell,  Stillman  F.  Kelley,  E.  Rollins  Morse, 
Richard  Olney,  Percy  Parker,  S.  Endicott  Peabody,  and  Philip 
L.  Saltonstall,  Trustees,  hereinbefore  mentioned,  have  hereunto 
set  their  hands  and  seals,  in  token  of  their  acceptance  of  the 
trust  hereinbefore  mentioned,  for  themselves  and  their  succes- 
sors, and  the  said  E.  Rollins  Morse,  Henry  Russell  Shaw,  Robert 
W.  Emmons,  2d,  and  George  W.  Parker,  as  co-partners  under 
the  firm  name  of  E.  Rollins  Morse  and  Brothers,  and  William 
A.  Tucker,  S.  Reed  Anthony,  Philip  L.  Saltonstall,  and  Nathan 
Anthony,  as  co-partners  under  the  firm  name  of  Tucker,  An- 
thony and  Company,  Subscribers,  have  hereunto  set  their  hands 
and  seals,  in  token  of  their  assent  to  and  approval  of  said  terms 
of  trust,  for  themselves  and  their  assigns,  the  day  and  year  first 
above  written. 


(Signed) 

E.  Rollins  Morse, 
Henry  Russell  Shaw, 
Robert  W.  Emmons,  3d, 
George  W.  Parker, 

William  A.  Tucker, 
S.  Reed  Anthony, 
Philip  L.  Saltonstall, 
Nathan  Anthony, 

Gordon  Abbott, 
Charles  F.  Adams,  2d, 
S.  Reed  Anthony, 
John  N.  Beckley, 
Amos  F.  Breed, 
Everett  W.   Burdett, 
Charles  E.  Cotting, 
Eugene  N.  Foss, 


CO-PARTNERS     UNDER    THE 

FIRM  NAME   OF    E.  ROLLINS 

MORSE  &  BROTHERS. 

CO-PARTNERS     UNDER    THE 
FIRM  NAME  OF  TUCKER,  AN- 
THONY &  COMPANY. 

Walter  Hunnewell, 
Stillman  F.  Kelley, 
E.  Rollins  Morse, 
Richard   Olney, 
Percy  Parker, 
S.  E.  Peabody, 
Philip  L.   Saltonstall. 


299 


EXHIBITS. 

Agreement  and 

Declaration  of  Trust  of  the 

MASSACHUSETTS   ELECTRIC   COMPANIES. 

For  three  years: 

Richard   Olney,  Eugene  N.  Foss, 

Charles  E.  Cotting,  Percy  Parker, 

Charles  Francis  Adams,  2d. 

For  two  years: 

Gordon  Abbott,  John  N.  Beckley, 

Amos  F.  Breed,  Stillman  F.  Kelley, 

Walter  N.  Hunnewell. 

For  one  year: 

S.  Endicott  Peabody,  Everett  W.  Burdett, 

S.  Reed  Anthony,  Philip  L.  Saltonstall, 

E.  Rollins  Morse. 

OFFICERS. 

President — Amos  F.  Breed. 
Vice-President — Charles  E.  Cotting. 
Secretary — Everett  W.   Burdett. 
Treasurer — Joseph    H.    Goodspeed. 
General  Manager — P.  F.   Sullivan. 

Executive  Committee: 

Gordon  Abbott,  Chairman, 

Charles  F.  Adams,  2d,  Percy  Parker, 

Eugene  N.  Foss,  Philip  L.  Saltonstall. 


300 


FORM  OF  DECLARATION  OF  TRUST  ESTABLISHING  A  MANUFAC- 
TURING COMPANY. 

Agreement  and 

Declaration  of  Trust  of  the 

MASSACHUSETTS  GAS  COMPANIES. 

THIS  AGREEMENT,  made  this  twenty-fifth  day  of  Sep- 
tember, A.  D.  nineteen  hundred  and  two,  by  and  between 
Charles  Francis  Adams,  2d,  Walter  Cabot  Baylies,  Samuel  Carr, 
Robert  Clarence  Pruyn,  Joseph  Ballister  Russell,  Frederic  El- 
mer Snow,  Charles  Augustus  Stone,  Albert  Strauss,  Christopher 
Minot  Weld,  and  Robert  Winsor,  together  with  their  successors 
(herein  designated  as  the  "Trustees"),  and  Francis  H.  Peabody, 
Frank  G.  Webster,  Frank  E.  Peabody,  and  Robert  Winsor,  co- 
partners, carrying  on  business  in  the  city  of  Boston  under  the 
name  of  Kidder,  Peabody  &  Company,  and  James  Seligman, 
Isaac  N.  Seligman,  Henry  Seligman,  Jefferson  Seligman,  Emil 
Carlebach,  Albert  Strauss,  and  Frederick  Strauss,  co-partners, 
carrying  on  business  in  the  city  of  New  York  under  the  name 
of  J.  &  W.  Seligman  &  Company,  together  with  their  assigns 
(herein  designated  as  the  "Subscribers"),  witnesseth: 

WHEREAS  it  is  proposed  that  the  Trustees  shall  acquire 
from  the  subscribers,  upon  such  terms  and  conditions  as  may 
be  agreed  upon,  certain  property  and  cash,  and  shall  employ  and 
manage  the  same  and  all  other  property  which  they  may  here- 
after acquire  as  such  Trustees,  in  the  manner  hereinafter  stated ; 
and  it  is  likewise  proposed  that  the  beneficial  interest  in  the 
property,  from  time  to  time  held  by  the  Trustees,  and  in  the 
business  conducted  by  them,  shall  be  divided  into  shares  to  be 
evidenced  by  certificates  therefor,  as  hereinafter  provided: 

NOW,  THEREFOR,  the  Trustees  hereby  declare  that  they 
will  hold  said  property  and  cash  so  to  be  acquired  by  them  as 

301 


EXHIBITS. 

well  as  all  other  property  which  they  may  acquire  as  such 
Trustees,  together  with  the  proceeds  thereof,  in  trust,  to  man- 
age and  dispose  of  the  same  for  the  benefit  of  the  holders,  from 
time  to  time,  of  the  certificates  of  shares  issued  and  to  be  issued 
hereunder,  according  to  the  priorities  expressed  in  said  certifi- 
cates, and  in  the  manner  and  subject  to  the  stipulations  herein 
contained,  to-wit: 

FIRST.  The  Trustees,  in  their  collective  capacity,  shall  be 
designated,  so  far  as  practicable,  as  the  "Massachusetts  Gas 
Companies"  and  under  that  name  shall,  so  far  as  practicable, 
conduct  all  business  and  execute  all  instruments  in  writing,  in 
the  performance  of  their  trust. 

SECOND.  The  Trustees  shall  be  ten  in  number;  and,  of 
the  Trustees  herein  mentioned  by  name,  Charles  Francis  Adams, 
2d,  Walter  Cabot  Baylies,  Samuel  Carr,  Robert  Clarence  Pruyn 
and  Joseph  Ballister  Russell  shall  hold  office  until  the  first 
annual  meeting  of  the  shareholders,  and  Frederic  Elmer  Snow, 
Charles  Augustus  Stone,  Albert  Strauss,  Christopher  Minot 
Weld  and  Robert  Winsor  shall  hold  office  until  the  second  an- 
nual meeting  of  the  shareholders,  except  that  said  Trustees,  as 
well  as  any  Trustees  hereafter  elected,  shall  in  all  cases  hold 
office  until  their  successors  have  been  elected,  and  accepted  this 
trust. 

The  shareholders  shall,  at  each  annual  meeting,  or  adjourn- 
ment thereof,  elect  five  Trustees  to  serve  for  the  term  of  two 
years  next  ensuing.  In  case  of  the  death,  resignation,  or  in- 
ability to  act  of  any  of  said  Trustees,  the  remaining  Trustees 
shall  fill  any  vacancies  for  the  unexpired  term.  As  soon  as 
any  Trustees  elected  by  the  shareholders  or  by  the  remaining 
Trustees  to  fill  a  vacancy  have  accepted  this  trust,  the  trust 
estate  shall  vest  in  the  new  Trustees  or  Trustee,  together  with 
the  continuing  Trustees,  without  any  further  act  or  conveyance. 

Upon  the  election  of  any  Trustee  either  by  the  remaining 
Trustees  to  fill  a  vacancy,  or  by  the  shareholders,  he  shall  forth- 
with execute  a  written  acceptance  of  this  trust,  which,  together 
302 


MANUFACTURING   TRUST. 

with  a  certificate  of  the  Secretary  of  the  election  of  such  trustee 
shall  be  forthwith  filed  with  the  Trust  Company  at  that  time 
having  the  custody  of  the  duplicate  original  of  this  instrument. 

THIRD.     The  Trustees  are  authorized  to  engage — 

(a)  In  the  business  of  manufacturing,  buying,  selling  and 
dealing  in  coal,  oil,  coke,  gas  and  all  products  thereof; 

(b)  In  the  business  of  manufacturing  and  supplying  gas  or 
electricity  or  any  other  agent   for  light,  heat,  power,  or  other 
purposes ; 

(c)  In  the  business    of    acquiring,    owning,  managing,  ex- 
changing, selling,  and  dealing  in  the  stocks,  shares  and  securities 
of  corporations,  trusts  or  associations  engaged,  in  whole  or  in 
part,  in  any  business  above  mentioned,  or  in  owning  or  operating 
railways  or  railroads  or  transporting  passengers,  merchandise, 
mails  or  express  matter,  or  in  manufacturing,  selling  or  repair- 
ing machines,  equipments,   supplies,  or  other  articles  used  by 
corporations,  trusts  or  associations  of  any  of  the  classes  above 
mentioned,  and  or  in  the  business  of  acquiring,  owning,  manag- 
ing,  exchanging,   selling,   or  dealing  in   the   stocks,    shares   or 
securities  of  any  corporation,  trust  or  association  which  owns, 
or  whose  stock  or  securities  are  based  upon  or  secured  by  the 
stocks  or  securities  of  any  corporation,  trust  or  association  of 
the  character  above  mentioned; 

(d)  In  any  business  similar  in  character  to  that  above  men- 
tioned which  the  trustees  may  deem  expedient,  and  to  acquire, 
hold,  and  dispose  of  the  stocks,  shares  or  securities  of  corpor- 
ations, trusts  or  associations    doing    business    of    a    character 
similar  to  any  business  above  described. 

The  Trustees  shall  hold  the  legal  title  to  all  property  at  any 
time  belonging  to  this  trust,  and,  subject  only  to  the  specific 
limitations  herein  contained,  they  shall  have  the  absolute  con- 
trol, management,  and  disposition  thereof,  and  shall  likewise 
have  the  absolute  control  of  the  conduct  of  all  business  of  the 

303 


EXHIBITS. 

trust;  and  the  following  enumeration  of  specific  duties  and 
powers  shall  not  be  construed  in  any  way  as  a  limitation  upon 
the  general  powers  intended  to  be  conferred  upon  them. 

The  Trustees  shall  have  authority  to  adopt  and  use  a  common 
seal;  to  make  all  such  contracts  as  they  may  deem  expedient  in 
the  conduct  of  the  business  of  the  trust;  from  time  to  time  to 
release,  sell,  exchange,  or  otherwise  dispose  of,  at  public  or 
private  sale,  any  or  all  of  the  trust  property,  whether  real  or 
personal,  for  such  prices  either  in  cash  or  the  stocks,  shares,  or 
securities  of  other  corporations,  trusts  or  associations  and  upon 
such  terms  as  to  credit  or  otherwise  as  they  may  deem  expedient ; 
to  guarantee  or  assume  the  obligations  of  other  corporations, 
trusts  or  associations  and  to  enter  into  such  agreements  by  way 
of  indemnity  or  otherwise  as  they  may  deem  expedient  in  con- 
nection with  the  acquisition  of  property  from  the  subscribers 
as  hereinbefore  provided  or  otherwise;  to  confer,  by  way  of 
substitution,  such  power  and  authority  on  the  President,  Treas- 
urer, Secretary,  and  Executive  Committee,  and  other  officers 
and  agents  appointed  by  them,  as  they  may  deem  expedient;  to 
borrow  money  for  the  purposes  of  the  trust  and  give  the  obli- 
gations to  the  Trustees  therefor;  to  loan  any  money  from  time 
to  time  in  the  hands  of  the  Trustees,  with  or  without  security, 
on  such  terms  as  they  may  deem  expedient;  to  subscribe  for, 
acquire,  own,  sell,  or  otherwise  dispose  of  such  real  or  personal 
property,  including  the  stocks,  shares,  and  securities  of  any  other 
corporations,  trusts  or  associations,  as  they  may  deem  expedient 
in  connection  with  the  purposes  of  the  trust;  to  vote  in  person 
or  by  proxy  on  all  shares  of  stock  at  any  time  held  by  them, 
and  to  collect  and  receive  the  income,  interest,  and  profits  of 
any  such  stock  or  securities ;  to  collect,  sue  for,  receive,  and  re- 
ceipt for  all  sums  of  money  at  any  time  becoming  due  to  said 
trust;  to  employ  counsel  and  to  begin,  prosecute,  defend,  and 
settle  suits  at  law,  in  equity  or  otherwise,  and  to  compromise  or 
refer  to  arbitration  any  claims  in  favor  of  or  against  the  trust; 
and  in  general  to  do  all  such  matters  and  things  as  in  their 
judgment  will  promote  or  advance  the  business  which  they  are 
authorized  to  carry  on,  although  such  matters  and  things  may 
304 


MANUFACTURING   TRUST. 

be  neither  specifically  authorized  nor  incidental  to  any  matters 
or  things  specifically  authorized.  In  addition  to  the  powers 
herein  granted  the  Trustees  shall  have  all  powers  with  reference 
to  the  conduct  of  the  business  and  management  of  the  property 
of  the  trust  which  are  possessed  by  directors  of  a  manufacturing 
corporation  under  the  laws  of  the  Commonwealth  of  Massachu- 
setts. 

So  far  as  strangers  to  the  trust  are  concerned,  a  resolution 
of  the  Trustees  authorizing  a  particular  act  to  be  done  shall  be 
conclusive  evidence  in  favor  of  strangers  that  such  act  is  within 
the  power  of  the  Trustees ;  and  no  purchaser  from  the  Trustees 
shall  be  bound  to  see  to  the  application  of  the  purchase  money 
or  other  consideration  paid  or  delivered  by  or  for  said  purchaser 
to  or  for  the  Trustees. 

FOURTH.  Stated  meetings  of  the  Trustees  shall  be  held 
at  least  once  a  month,  and  other  meetings  shall  be  held  from 
time  to  time  upon  the  call  of  the  President  or  any  three  of  the 
Trustees.  A  majority  of  the  Trustees  shall  constitute  a  quorum ; 
and  the  concurrence  of  all  the  Trustees  shall  not  be  necessary 
to  the  validity  of  any  action  taken  by  them,  but  the  decision  ex- 
pressed by  vote  of  a  majority  of  the  Trustees  present  and  voting 
at  any  meeting  shall  be  conclusive. 

The  Trustees  may  make,  adopt,  amend,  or  repeal  such  by-laws, 
rules,  and  regulations  not  inconsistent  with  the  terms  of  this 
instrument  as  they  may  deem  necessary  or  desirable  for  the 
conduct  of  their  business  and  for  the  government  of  themselves, 
their  agents,  servants  and  representatives. 

FIFTH.  The  Trustees  shall  annually  elect  from  among  their 
number  a  President,  and  shall  also  elect  from  among  their 
number  or  otherwise,  a  Treasurer,  a  Secretary,  and,  in  their 
discretion,  one  or  more  Vice-Presidents,  and  one  or  more  Assist- 
ant Treasurers  or  Secretaries,  and  they  shall  have  authority  to 
appoint  such  other  officers,  agents,  and  attorneys  as  they  may 
deem  necessary  or  expedient  in  the  conduct  of  their  business. 
They  shall  also  have  authority  to  accept  resignations  and  to  fill 

305 


EXHIBITS. 

any  vacancies  in  the  offices  appointed  by  them,  for  the  unexpired 
term,  and  shall  likewise  have  authority  to  elect  temporary  of- 
ficers to  serve  during  the  absence  or  disability  of  regular  officers. 
They  may  also  by  a  majority  vote  of  all  the  Trustees,  remove 
any  officer  or  agent  elected  or  appointed  by  them. 

The  President,  Treasurer,  and  Secretary  shall  have  the  author- 
ity and  perform  the  duties  usually  incident  to  those  offices  in 
the  case  of  corporations,  so  far  as  applicable  thereto,  and  shall 
have  such  other  authority  and  perform  such  other  duties  as 
may  from  time  to  time  be  determined  by  the  Trustees.  The 
Trustees  shall  fix  the  compensation,  if  any,  of  all  officers  and 
agents  whom  they  may  elect  or  appoint,  and  may  also  pay  to 
themselves  such  compensation  for  their  own  services  as  they 
may  deem  reasonable. 

The  Trustees  may  also  appoint  from  among  their  number 
an  Executive  Committee  of  three  or  five  persons,  to  whom  they 
may  delegate  such  of  the  powers  herein  conferred  upon  the 
Trustees  as  they  may  deem  expedient. 

The  Trustees  shall  cause  to  be  kept  by  the  Secretary  elected 
by  them  a  record  of  all  meetings  of  the  shareholders,  Trustees 
and  Executive  Committee,  which  record  shall  be  of  the  same 
character  and  effect  as  that  kept  in  the  case  of  corporations, 
and  so  far  as  strangers  to  the  trust  are  concerned,  shall  be 
conclusive  against  the  Trustees  of  the  facts  and  doings  therein 
stated. 

The  Trustees  shall  not  be  liable  for  any  error  of  judgment, 
or  for  any  loss  arising  out  of  any  act  or  omission  in  the  exe- 
cution of  this  trust,  so  long  as  they  act  in  good  faith,  nor  shall 
they  be  personally  liable  for  the  acts  or  omissions  of  each 
other,  or  for  the  acts  or  omissions  of  any  officer,  agent,  or 
servant  elected  or  appointed  by  or  acting  for  them;  and  they 
shall  not  be  obliged  to  give  any  bond  to  secure  the  due  per- 
formance of  this  trust  by  them. 
306 


MANUFACTURING   TRUST. 

Any  Trustee  may  acquire,  own,  and  dispose  of  shares  in 
this  trust  to  the  same  extent  as  if  he  were  not  a  Trustee. 

SIXTH.  The  beneficial  interest  in  this  trust  shall,  in  the 
first  instance,  be  divided  into  three  hundred  thousand  (300,000) 
shares  of  the  par  value  of  one  hundred  (100)  dollars  each,  of 
which  one  hundred  and  fifty  thousand  (150,000)  shares  shall 
be  preferred  and  one  hundred  and  fifty  thousand  (150,000) 
common. 

The  preferred  shares  shall  entitle  the  holder  to  receive  out 
of  the  net  profits  of  the  trust,  a  semi-annual,  preferential,  cumu- 
lative dividend  at  the  rate  of  four  per  centum  per  annum,  and 
no  more,  commencing  to  accrue  on  the  first  day  of  December, 
1902,  payable  on  the  first  days  of  June  and  December  in  each 
year,  and  to  be  paid  or  provided  for  before  any  dividend  shall 
be  set  apart  or  paid  on  the  common  shares,  provided  that  after 
the  payment  or  setting  aside  of  a  semi-annual  dividend  on  the 
preferred  shares  at  the  rate  of  four  per  centum  per  annum,  all 
previously  accrued  dividends  thereon  having  been  paid  or  set 
aside,  the  Trustees  may  forthwith,  without  waiting  for  the 
expiration  of  the  year,  pay  or  set  aside  a  semi-annual  dividend 
on  the  common  shares;  and,  in  case  of  liquidation,  the  pro- 
ceeds of  liquidation  shall  be  first  applied  to  the  payment  to  the 
holders  of  preferred  shares  of  the  sum  of  one  hundred  dollars 
per  share  and  accrued  and  unpaid  dividends  thereon,  and  the 
balance  remaining  thereafter  shall  be  divided  among  the  holders 
of  common  shares  in  proportion  to  their  holdings. 

As  evidence  of  the  ownership  of  said  shares  the  Trustees 
shall  cause  to  be  issued  to  each  shareholder  a  negotiable  cer- 
tificate, or  certificates,  to  be  signed  by  such  transfer  agent  or 
transfer  agents  and  registrar  or  registrars  as  the  Trustees  may 
determine,  and  by  the  President  or  any  Vice-President,  and 

307 


EXHIBITS. 

attested  by  any  Secretary  or  Assistant   Secretary,  which   cer- 
tificates shall  be  in  the  form  following,  to-wit: 

MASSACHUSETTS   GAS   COMPANIES. 
No.  Preferred  Shares. 

Not  subject  to  assessment. 
This  certifies  that 

is  the  holder  of  Preferred  Shares 

in  the  Massachusetts  Gas  Companies,  which  he  holds  subject 
to  an  Agreement  and  Declaration  of  Trust  dated  September 
25th,  1902,  a  duplicate  original  of  which  is  on  file  with  the 
Trust  Company,  and  which  is  hereby  re- 
ferred to  and  made  a  part  of  this  certificate. 

The  shares  in  the  Massachusetts  Gas  Companies  are  of  the 
par  value  of  one  hundred  dollars  each,  and  are  divided  into 
preferred  and  common  shares. 

It  is  mutually  agreed  between  the  holder  hereof  and  the 
Massachusetts  Gas  Companies  and  its  shareholders  as  follows: 
that  the  preferred  shares  are  entitled  out  of  the  net  profits  of 
the  Companies  to  a  semi-annual,  preferential,  cumulative  divi- 
dend at  the  rate  of  four  per  centum  per  annum,  and  no  more, 
commencing  to  accrue  on  the  1st  day  of  December,  1902,  pay- 
able on  the  first  days  of  June  and  December  in  each  year,  and 
to  be  paid  or  provided  for  before  any  dividend  shall  be  set  apart 
or  paid  on  the  common  shares,  provided  that  after  the  payment 
or  setting  aside  of  a  semi-annual  dividend  on  the  preferred 
shares  at  the  rate  of  four  per  centum  per  annum,  all  previously 
accrued  dividends  thereon  having  been  paid  or  set  aside,  the 
Massachusetts  Gas  Companies  may  forthwith,  without  waiting 
for  the  expiration  of  the  year,  pay  or  set  aside  a  semi-annual 
dividend  on  the  common  shares ;  that  in  the  event  of  liquidation 
the  proceeds  of  liquidation  shall  be  first  applied  to  the  payment, 
to  holders  of  the  preferred  shares,  of  the  sum  of  one  hundred 
dollars  per  share  and  accrued  and  unpaid  dividends  thereon, 
and  the  balance  remaining  thereafter  shall  be  divided  among 
308 


CERTIFICATES    OF    SHARES. 

the  holders  of  common  shares  in  proportion  to  their  holdings; 
that  the  holders  of  preferred  and  common  shares  shall  have 
equal  voting  powers,  and  that  the  preferred  and  common  shares 
may  be  increased  or  reduced  as  provided  in  the  Agreement  and 
Declaration  of  Trust  herein  referred  to. 

This  certificate  must  be  signed  by  the  Transfer  Agent  and 
Registrar  of  the  shares  of  the  Massachusetts  Gas  Companies, 
who  sign  solely  to  indicate  that  the  shares  represented  by  this 
and  all  other  outstanding  certificates  bearing  their  signatures 
do  not  exceed  the  issue  of  shares  fixed  by  the  votes  of  the  Mas- 
sachusetts Gas  Companies. 

No  transfer  hereof  will  be  of  any  effect  as  regards  the  Mass- 
achusetts Gas  Companies  until  this  certificate  has  been  surren- 
dered and  the  transfer  recorded  upon  their  books. 

IN  WITNESS  WHEREOF,  the  Trustees  under  said  Declar- 
ation of  Trust  herein  designated  as  the  Massachusetts  Gas 
Companies,  have  caused  their  common  seal  to  be  hereto  affixed 
and  this  certificate  to  be  executed  in  their  name  and  behalf,  by 

their  President,  and  attested  by  their  Secretary,  this 
day  of  19      . 

MASSACHUSETTS  GAS  COMPANIES. 

By ,  President. 

Attest : 

By ,  Secretary. 

By ,  Transfer   Agent. 

By ,  Registrar. 

By 

309 


EXHIBITS. 

2  5  ojj  g     For  value  received 

o*|jl     hereby  sell,  assign,  and  transfer  unto 

£§S  a. §  preferred  shares  of  the  Massachusetts  Gas 

*  salt's     Companies,  represented  by  the  within  certificate,  and  do 

t»O  3  >  ^  *« 

"""SflSl  hereby  irrevocably  constitute  and  appoint 

_g  "S^S  « 

^S&Sgfc  attorney,  to  transfer  the  said  shares  on 

wf*sf &  the   books   of   the   within-named    Companies,   with   full 
Hcli^jq  power  of  substitution  in  the  premises. 

fcfllfi       Witness  hand  this  day  of 

•  4*«*F  •  J 

In  presence  of 

MASSACHUSETTS   GAS   COMPANIES. 
No.  Common  Shares. 

Not  subject  to  assessment. 

This  certifies  that 

is  the  holder  of  Common  Shares  in 

the  Massachusetts  Gas  Companies,  which  he  holds  subject  to 
an  Agreement  and  Declaration  of  Trust  dated  September  25th, 
1902,  a  duplicate  original  of  which  is  on  file  with  the  Old  Colony 
Trust  Company,  and  which  is  hereby  referred  to  and  made  a 
part  of  this  certificate. 

The  shares  in  the  Massachusetts  Gas  Companies  are  of  the 
par  value  of  one  hundred  dollars  each,  and  are  divided  into 
preferred  and  common  shares. 

It  is  mutually  agreed  between  the  holder  hereof  and  the  Mass- 
achusetts Gas  Companies  and  its  shareholders  as  follows;  that 
the  preferred  shares  are  entitled  out  of  the  net  profits  of  the 
Companies  to  a  semi-annual,  preferential,  cumulative  dividend 
at  the  rate  of  four  per  centum  per  annum,  and  no  more,  com- 
mencing to  accrue  on  the  1st  day  of  December,  1902,  payable 
on  the  first  days  of  June  and  December  in  each  year,  and  to  be 
paid  or  provided  for  before  any  dividend  shall  be  set  apart  or 
paid  on  the  common  shares,  provided  that  after  the  payment  or 
setting  aside  of  a  semi-annual  dividend  on  the  preferred  shares 
310 


CERTIFICATES    OF    SHARES. 

at  the  rate  of  four  per  centum  per  annum,  all  previously  accrued 
dividends  thereon  having  been  paid  or  set  aside,  the  Massachu- 
setts Gas  Companies  may  forthwith,  without  waiting  for  the 
expiration  of  the  year,  pay  or  set  aside  a  semi-annual  dividend 
on  the  common  shares;  that  in  the  event  of  liquidation  the  pro- 
ceeds of  liquidation  shall  be  first  applied  to  the  payment,  to 
holders  of  the  preferred  shares,  of  the  sum  of  one  hundred 
dollars  per  share  and  accrued  and  unpaid  dividends  thereon, 
and  the  balance  remaining  thereafter  shall  be  divided  among 
the  holders  of  common  shares  in  proportion  to  their  holdings ; 
that  the  holders  of  preferred  and  common  shares  shall  have 
equal  voting  powers ;  and  that  the  preferred  and  common  shares 
may  be  increased  or  reduced  as  provided  in  the  agreement  and 
Declaration  of  Trust  herein  referred  to. 

This  certificate  must  be  signed  by  the  Transfer  Agent  and 
Registrar  of  the  shares  of  the  Massachusetts  Gas  Companies, 
who  sign  solely  to  indicate  that  the  shares  represented  by  this 
and  all  other  outstanding  certificates  bearing  their  signatures 
do  not  exceed  the  issue  of  shares  fixed  by  the  votes  of  the  Massa- 
chusetts Gas  Companies. 

No  transfer  hereof  will  be  of  any  effect  as  regards  the  Massa- 
chusetts Gas  Companies  until  this  certificate  has  been  surren- 
dered and  the  transfer  recorded  upon  their  books. 

IN  WITNESS  WHEREOF,  the  Trustees  under  said  Declar- 
ation of  Trust,  herein  designated  as  the  Massachusetts  Gas 
Companies,  have  caused  their  common  seal  to  be  hereto  affixed 
and  this  certificate  to  be  executed  in  their  name  and  behalf  by 
their  President,  and  attested  by  their  Secretary,  this 

day  of  ,  19       . 

MASSACHUSETTS   GAS   COMPANIES. 

By ,  President. 

Attest : 

By ,  Secretary. 

311 


EXHIBITS. 

By ,  Transfer  Agent. 

By ,  Registrar. 

By 

S.§°J3®  For  value  received 

S'o^fs  hereby  sell,  assign,  and  transfer  unto 

slab's  common  shares  of  the  Massachusetts  Gas 

gfcafcg^.  Companies  represented  by  the  within  certificate,  and  do 

"«|*c«   hereby  irrevocably  constitute  and  appoint 

V  «3s*  attorney,  to  transfer  the  said  shares  on 

glSf^l   the   books   of   the    within-named    Companies,    with    full 

gll»s5    power  of  substitution  in  the  premises. 
ota°£o     f 

^lllf  I       Witness  hand  this  day  of 

In  presence  of 

SEVENTH.  The  shares  hereunder  shall  be  transferable  by 
an  appropriate  instrument  in  writing  and  upon  the  surrender 
of  the  certificate  therefor,  but  no  such  transfer  shall  be  of  any 
effect  as  regards  the  Trustees  until  it  has  been  recorded  upon 
the  books  of  the  Trustees  kept  for  that  purpose. 

EIGHTH.  The  Trustees  shall  issue  to  the  Subscribers,  or 
their  assigns,  certificates  for  said  original  three  hundred  thousand 
shares,  in  payment  for  and  as  evidence  of  their  ownership  of 
the  beneficial  interest  in  the  property  and  cash  proposed  to  be 
transferred  to  the  Trustees  by  the  Subscribers,  as  hereinbefore 
stated. 

NINTH.  For  any  of  the  purposes  of  the  Trust  the  number 
of  shares  may  from  time  to  time,  with  the  consent  of  the 
holders  of  not  less  than  two-thirds  of  such  of  the  shares  as  are 
represented  and  voted  upon  at  any  meeting  called  for  that  pur- 
pose, but  not  otherwise,  be  increased  or  reduced.  In  case  the 
number  of  shares  is  increased,  the  additional  shares  shall  be 
issued  and  disposed  of  upon  such  terms  and  in  such  manner  as 
the  shareholders  at  such  meeting  may  determine,  and  in  case  of 
312 


MANUFACTURING   TRUST. 

such  increase  such  proportion  of  the  new  shares  may  be  made 
preferred  as  the  shareholders  in  authorizing  such  increase  may 
determine. 

TENTH.  In  case  of  the  loss  or  destruction  of  any  certificate 
for  shares  the  Trustees  may,  under  such  conditions  as  they  may 
deem  expedient,  issue  a  new  certificate  or  certificates  in  place  of 
the  one  lost  or  destroyed. 

ELEVENTH.  The  Trustees  may,  with  the  consent  of  the 
holders  of  at  least  two-thirds  of  each  class  of  shares  outstanding, 
given  at  a  meeting  called  for  that  purpose,  but  not  otherwise, 
mortgage  or  pledge  any  property  in  their  hands,  upon  such 
terms  and  for  such  purposes  as  the  shareholders  at  such  meeting 
may  approve. 

TWELFTH.  The  Trustees  may  from  time  to  time  declare 
and  pay  dividends  out  of  the  net  earnings  from  time  to  time 
received  by  them  but  the  amount  of  such  dividends  and  the 
payment  of  them  shall  be  wholly  in  the  discretion  of  the  Trustees, 
except  that  the  dividends  on  the  preferred  shares  shall  be  pay- 
able semi-annually  on  the  first  day  of  June  and  December  in 
each  year,  at  the  rate  of  four  per  centum  per  annum  and  no 
more,  and  shall  be  cumulative,  and  said  semi-annual  dividends 
shall  be  paid  or  set  apart  before  any  dividends  are  paid  on  the 
common  shares. 

THIRTEENTH.  The  fiscal  year  of  the  Trustees  shall  end 
on  the  first  day  of  July  in  each  year. 

Annual  meetings  for  the  election  of  Trustees  and  for  the 
transaction  of  other  business  shall  be  held  in  Boston,  on  the 
second  Tuesday  of  October  in  each  year,  beginning  with  the 
year  1903,  of  which  meetings  notice  shall  be  given  by  the  Secre- 
tary by  mailing  such  notice  to  each  shareholder  at  .his  registered 
address  at  least  ten  days  before  said  meeting. 

Special  meetings  of  the  shareholders  may  be  called  at  any 
time  upon  seven  days'  notice,  given  as  above  stated,  when  or- 
dered by  the  President  or  Trustees. 

313 


EXHIBITS. 

At  all  meetings  of  the  shareholders,  each  holder  of  shares, 
whether  preferred  or  common,  shall  be  entitled  to  one  vote  for 
each  share  held  by  him ;  and  any  shareholder  may  vote  by  proxy. 

No  business  shall  be  transacted  at  any  special  meeting  of  the 
shareholders  unless  notice  of  such  business  has  been  given  in 
the  call  for  the  meeting.  No  business,  except  to  adjourn,  shall 
be  transacted  at  any  meeting  of  the  shareholders  unless  the 
holders  of  a  majority  of  all  the  shares  outstanding  are  present 
in  person  or  by  proxy. 

FOURTEENTH.  Shares  hereunder  shall  be  personal  prop- 
erty, giving  only  the  rights  in  this  instrument,  and  in  the  cer- 
tificates thereof,  specifically  set  forth.  The  death  of  a  share- 
holder during  the  continuance  of  this  trust  shall  not  operate  to 
determine  this  trust,  nor  shall  it  entitle  the  representatives  of  the 
deceased  shareholder  to  an  accounting  or  to  take  any  action  in 
the  courts  or  elsewhere  against  the  Trustees;  but  the  executors, 
administrators,  or  assigns  of  any  deceased  shareholder  shall 
succeed  to  the  rights  of  said  decedent  under  this  trust,  upon  the 
surrender  of  the  certificate  of  shares  owned  by  them. 

The  ownership  of  shares  hereunder  shall  not  entitle  the  share- 
holders to  any  title  in  or  to  the  trust  property  whatsoever,  or 
right  to  call  for  a  partition  or  division  of  the  same,  or  for  an 
accounting;1  and  no  shareholder  shall  have  any  other  or  further 
rights  than  the  rights  of  a  stockholder  in  a  corporation,  so  far 
as  the  same  may  be  applicable.2 

FIFTEENTH.  The  Trustees  shall  have  no  power  to  bind  the 
shareholders  personally,  or  to  call  upon  them  for  the  payment 
of  any  sum  of  money  or  any  assessment  whatever  other  than 
such  sums  as  they  may  at  any  time  personally  agree  to  pay  by 
way  of  subscription  to  new  shares  or  otherwise.  All  persons  or 
corporations  extending  credit  to,  contracting  with,  or  having  any 
claim  against'  the  Trustees  shall  look  only  to  the  funds  and 

iSee  note  on  page  297. 

2It  is  not  considered  that  this  clause  would  change   or  was  in- 
tended  to    change    the   trustee's   responsibility,    as    see    §    135,    where 
the    duties    and    responsibilities    of    trustees    and    directors    are    dis- 
tinguished. 
314 


MANUFACTURING   TRUST. 

property  of  the  trust  for  the  payment  of  any  such  contract  or 
claim,  or  for  the  payment  of  any  debt,  damage,  judgment,  or 
decree,  or  of  any  money  that  may  otherwise  become  due  or 
payable  to  them  from  the  Trustees,  so  that  neither  the  Trustees, 
shareholders,  nor  officers,  present  or  future,  shall  be  personally 
liable  therefor. 

In  every  written  order,  contract,  or  obligation  which  the  Trus- 
tees or  officers  shall  give,  authorize,  or  enter  into,  it  shall  be  the 
duty  of  the  Trustees  and  officers  to  stipulate,  or  cause  to  be 
stipulated,  that  neither  the  Trustees,  officers,  nor  shareholders 
shall  be  held  to  any  personal  liability  under  or  by  reason  of  such 
order,  contract  or  obligation. 

It  is  further  expressly  agreed  that  in  case  any  Trustee,  officer, 
or  shareholder  shall  at  any  time  for  any  reason  be  held  to  or 
be  under  any  personal  liability  as  such  Trustee,  officer,  or  share- 
holder, not  due  to  his  acts  in  bad  faith,  then  such  Trustee,  officer, 
or  shareholder,  shall  be  held  harmless  and  indemnified  out  of 
the  trust  estate  from  and  of  all  loss,  cost,  damage,  or  expense 
by  reason  of  such  liability:  and,  if  at  any  time  the  trust  estate 
shall  be  insufficient  to  provide  for  such  indemnity  and  to  satisfy 
all  liabilities  of  and  claims  upon  it,  then  the  trust  estate  shall, 
in  preference  and  priority  over  any  and  all  other  claims  or  liens 
whatsoever,  except  mortgages,  and  except  as  otherwise  expressly 
provided  by  law,  be  applied  first  to  the  indemnification  of  the 
Trustees  from  any  loss,  cost,  damage  or  expense  in  connection 
with  any  personal  liability  which  they  may  be  under  or  have 
incurred  except  as  aforesaid :  next,  to  the  indemnification  in  the 
same  manner  of  the  officers,  and  thereafter  to  the  indemnifica- 
tion in  like  manner  of  the  shareholders. 

SIXTEENTH.  This  trust  shall  continue  for  the  term  of 
twenty-one  years  after  the  death  of  the  last  survivor  of  the 
persons  whose  names  are  signed  hereto,  at  which  time  the  then 
Trustees  shall  proceed  to  wind  up  its  affairs,  liquidate  its  assets, 
and  distribute  the  same  among  the  holders  of  preferred  and 
common  shares:  provided,  however,  that,  if  prior  to  the  expir- 
ation of  said  period  the  holders  of  at  least  two-thirds  of  the 

315 


EXHIBITS. 

shares  then  outstanding  shall,  at  a  meeting  called  for  that  pur- 
pose, vote  to  terminate  or  continue  this  trust,  then  said  trust 
shall  either  forthwith  terminate  or  continue  in  existence  for 
such  further  period  as  may  then  be  determined.3  For  the  pur- 
pose of  winding  up  their  affairs  and  liquidating  this  trust  the 
then  Trustees  shall  continue  in  office  until  such  duties  have  been 
fully  performed. 

SEVENTEENTH.  This  Agreement  and  Declaration  of 
Trust  may  be  amended  or  altered  in  any  particular  whatsoever, 
except  as  regards  the  exemption  from  personal  liability  of  the 
Trustees,  officers,  and  shareholders,  and  except  as  regards  the 
priorities  of  the  preferred  shares,  at  any  annual  or  special  meet- 
ing of  the  shareholders,  with  the  consent  of  the  holders  of  at 
least  two-thirds  of  the  shares  of  each  class  then  outstanding, 
provided  notice  of  the  proposed  amendment  or  alteration  shall 
have  been  given  in  the  call  for  the  meeting:  and  in  case  of  such 
alteration  or  amendment  the  same  shall  be  attached  to  and  made 
a  part  of  this  agreement,  and  a  copy  thereof,  with  a  certificate 
of  the  Secretary  as  to  its  adoption,  shall  be  filed  with  the  Trust 
Company  at  that  time  having  the  custody  of  the  duplicate  orig- 
inal of  this  instrument. 

Nothing  in  this  article  contained  shall  in  any  way  be  con- 
strued to  limit  the  power  to  increase  or  reduce  the  number  of 
shares  as  provided  in  the  ninth  article  hereof. 

EIGHTEENTH.  A  duplicate  original  of  this  Agreement  and 
Declaration  of  Trust  shall  be  deposited  with  such  Trust  Company 
in  the  City  of  Boston  as  the  Trustees  may  from  time  to  time 
designate,  and  the  Trustees  shall  have  power  at  any  time  to 
change  the  company  with  which  such  duplicate  original  is  de- 
posited. 

NINETEENTH.     The    Trustees    from    time  to  time   shall 
determine  whether  and  to  what  extent  and  at  what  times  and 
places  and  under  what  conditions  and  regulations  the  accounts 
and  books  of  the  Trustees  or  any  of  them  shall  be  open  to  the 
3As  to  validity  or  not  of  this  proviso  see  §§  96,  97,  171. 
316 


MANUFACTURING   TRUST. 

inspection  of  the  shareholders,  and  no  shareholder  shall  have 
any  right  to  inspect  any  account  or  book  or  document  of  the 
Trustees  except  as  authorized  by  the  Trustees  or  by  resolution 
of  the  shareholders. 

IN  WITNESS  WHEREOF,  the  said  Charles  Francis  Adams, 
2d,  Walter  Cabot  Baylies,  Samuel  Carr,  Robert  Clarence  Pruyn, 
Joseph  Ballister  Russell,  Frederic  Elmer  Snow,  Charles  Augustus 
Stone,  Albert  Strauss,  Christopher  Minot  Weld,  and  Robert 
Winsor,  Trustees  hereinbefore  mentioned,  have  hereunto  set 
their  hands  and  seals  in  token  of  their  acceptance  of  the  trust 
hereinbefore  mentioned,  for  themselves  and  their  successors, 
and  the  said  Francis  H.  Peabody,  Frank  G.  Webster,  Frank  E. 
Peabody,  and  Robert  Winsor,  co-partners,  carrying  on  business 
in  the  City  of  Boston  under  the  name  of  Kidder,  Peabody  & 
Company,  and  James  Seligman,  Isaac  N.  Seligman,  Henry  Selig- 
man,  Jefferson  Seligman,  Emil  Carlebach,  Albert  Strauss  and 
Frederick  Strauss,  co-partners,  carrying  on  business  in  the  City 
of  New  York,  under  the  name  of  J.  &  W.  Seligman  &  Company, 
have  hereunto  set  their  hand  and  seals  in  token  of  their  assent 
to  and  approval  of  said  terms  of  trust,  for  themselves  and  their 
assigns,  the  day  and  year  first  above  written. 

Charles  Francis  Adams  2nd  (seal)  p.p. a.  Francis   H.   Peabody     (seal) 

Frank  E.   Peabody 

Walter  Cabot  Baylies  "  Frank  G.  Webster 

Samuel  Carr  "  Frank  E.  Peabody  " 

Robert  Clarence  Pruyn  Robert  Winsor  " 

Joseph   Ballister  Russell  James  Seligman  " 

Trustees          Isaac  N.  Seligman 

Frederic   Elmer  Snow  (seal)  by  Henry  Seligman,  Atty. 

Charles  Augustus  Stone  Henry  Seligman 

Albert  Strauss  Jefferson  Seligman 

Christopher  Minot  Weld  Emil   Carlebach 

Robert  Winsor  Albert  Strauss 

Frederick  Strauss 

317 


EXHIBITS. 

Commonwealth  of  Massachusetts,  ) 
Suffolk,  )  SS' 

Boston,   Sept.  25,   1902. 

Then  personally  appeared  the  above  named  Charles  Francis 
Adams  2nd,  Walter  Cabot  Baylies,  Robert  Clarence  Pruyn, 
Joseph  Ballister  Russell,  Frederic  Elmer  Snow,  Charles  Au- 
gustus Stone,  Albert  Strauss,  Christopher  Minot  Weld,  Robert 
Winsor  and  Frank  E.  Peabody  and  acknowledged  the  forego- 
ing instrument  to  be  their  free  act  and  deed. 

Before  me, 

VINCENT  FARNSWORTH, 
(Notarial  Seal)  Notary  Public. 

Commonwealth  of  Massachusetts,  •} 
Suffolk,  J S 

Boston,  Sept.  26,  1902. 

Then  personally  appeared  the  above-named  Samuel  Carr, 
and  acknowledged  the  foregoing  instrument  to  be  his  free  act 
and  deed. 

Before  me, 

VINCENT  FARNSWORTH, 

(Notarial  Seal)  Notary  Public. 

September  25th,  1902. 

We,  the  undersigned,  Trustees  under  an  Agreement  and 
Declaration  of  Trust  of  the  Massachusetts  Gas  Companies  dated 
the  25th  day  of  September,  1902,  hereby  acknowledge  that  we 
have  received  due  notice  of  the  meeting  of  said  Trustees  to  be 
held  at  115  Devonshire  St.,  Boston,  Mass.,  on  the  25th  day  of 
September,  1902,  at  10  o'clock  A.  M.,  for  the  purposes  of  organi- 
zation, including  the  election  of  officers,  adoption  of  by-laws 
and  transaction  of  business  incidental  thereto,  for  the  purpose 
318 


MANUFACTURING    TRUST. 

of  considering  and  acting  upon  a  proposition  from  Kidder,  Pea- 
body  &  Company  and  J.  &  W.  Seligman  &  Company  relative  to 
the  transfer  to  the  Massachusetts  Gas  Companies  of  certain 
properties  and  cash  as  mentioned  in  the  Declaration  of  Trust 
of  said  Massachusetts  Gas  Companies,  and  taking  such  action  as 
may  be  necessary  to  carry  the  same  into  effect  if  the  offer 
contained  in  said  proposition  is  accepted;  and  we  hereby  con- 
sent and  agree  that  said  meeting  shall  be  held  at  the  time  and 
place  above  mentioned  for  the  purpose  above  stated. 
(Signed) 

CHARLES  FRANCIS  ADAMS,  2ND 
WALTER  CABOT  BAYLIES 
ROBERT  CLARENCE  PRUYN 
JOSEPH  BALLISTER  RUSSELL 
FREDERIC  ELMER  SNOW 
CHARLES  AUGUSTUS  STONE 
ALBERT  STRAUSS 
CHRISTOPHER  Mi  NOT  WELD 
ROBERT  WINSOR. 

September  25,  1902. 

We,  the  undersigned,  Trustees  under  an  Agreement  and 
Declaration  of  Trust  of  the  Massachusetts  Gas  Companies  dated 
the  25th  day  of  September,  1902,  hereby  acknowledge  that  we 
have  received  due  notice  of  the  meeting  of  said  trustees  to  be 
held  at  115  Devonshire  St.,  Boston,  Mass.,  on  the  25th  day  of 
September,  1902,  at  10  o'clock  A.  M.,  for  the  purposes  of  organ- 
ization, including  the  election  of  officers,  adoption  of  by-laws 
and  transaction  of  business  incidental  thereto,  for  the  purpose 
of  considering  and  acting  upon  a  proposition  from  Kidder,  Pea- 
body  &  Company  and  J.  &  W.  Seligman  &  Company  relative 
to  the  transfer  to  the  Massachusetts  Gas  Companies  of  certain 
properties  and  cash  as  mentioned  in  the  Declaration  of  Trust 
of  said  Massachusetts  Gas  Companies,  and  taking  such  action 
as  may  be  necessary  to  carry  the  same  into  effect  if  the  offer 
contained  in  said  proposition  is  accepted;  and  we  hereby  con- 
sent and  agree  that  said  meeting  shall  be  held  at  the  time  and 
place  above  mentioned  for  the  purposes  above  stated. 

(Signed)        SAMUEL  CARR. 
319 


STIPULATION    ON    STATIONERY. 

The  stationery  of  the  Massachusetts  Gas  Companies  has 
printed  in  red  ink  in  the  upper  right  hand  corner,  the  following: 

"The  name  'Massachusetts  Gas  Companies'  is  the  designation 
of  the  Trustees  for  the  time  being  under  an  agreement  and 
declaration  of  Trust,  dated  1902,  and  all  persons  dealing  with 
the  Massachusetts  Gas  Companies  must  look  solely  to  the  Trust 
property  for  the  enforcement  of  any  claim  against  the  Com- 
panies, as  neither  the  Trustees,  Officers  nor  Shareholders  as- 
sume any  personal  liability  for  obligations  entered  into  on  behalf 
of  the  Companies." 


320 


AGREEMENT  COVERING  REORGANIZATION    FROM   INCORPORATION 
TO  TRUSTEESHIP. 

AGREEMENT  made  this  day  of  , 

A.  D.  191       ,  between 

both  of  hereinafter  called  the 

Organizers,  parties  of  the  first  part,  the 
National  Bank,  doing1  business  at  said 

hereinafter  called  the  Depository,  party  of  the  second  part,  and 
such  holders  of  stock  in  the  Company, 

a  corporation  organized  according  to  law  and  having  a  usual 
place  of  business  at 

as  shall  become  parties  to  this  agreement,  by  signing  the  same  or 
any  copy  hereof,  hereinafter  designated  as  the  Subscribers,  par- 
ties of  the  third  part. 

WHEREAS  the  Organizers,  consider  that  it  will  be  for  the 
best  interests  of  the  individual  stockholders  of  the  said 

Company   that   a    Voluntary   Association    under   a 

written  Declaration  of  Trust  be  created,  to  be  known  as  the 

(or  by  some  other  name  satisfactory  to 

the  Organizers),  a  copy  of  which  Declaration  of  Trust,  iden- 
tified by  the  signatures  of  the  Organizers,  is  to  be  filed  with  the 
Depository  above-named,  and  which  is  hereby  referred  to  as  a 
part  of  this  agreement  as  fully  as  if  the  same  were  herein  set 
forth,  for  a  statement  of  the  purposes,  scope,  terms  and  pro- 
visions of  and  pertaining  to  said  Association,  it  being  under- 
stood that  the  persons  to  act  as  Trustees  under  said  Declara- 
tion are  to  be  hereafter  selected  by  said  Organizers,  and  their 
names  to  be  by  them  inserted  in  said  Declaration,  and  that  the 
number  of  shares  to  be  originally  issued  thereunder  by  the 
Trustees  is  to  be  hereafter  determined  and  inserted  therein  by 
the  Organizers,  subject  to  this  express  stipulation,  however,  that 
in  the  entire  amount  of  shares  to  be  originally  issued  under  said 

321 


EXHIBITS. 

Declaration,  the  number  of  shares  of  each  class  in  said  Associa- 
tion issued  to  each  Subscriber,  shall,  as  to  the  total  number  of 
shares  in  each  like  class  of  the  Association  to  be  originally  issued, 
be  exactly  proportional  to  the  amount  which  the  respective 
shares  of  stock  standing  on  the  books  of  the 
(corporation)  in  the  name  of  said  Subscriber  at  the  date  of 
transfer,  bear  to  the  whole  amount  of  outstanding  stock  of 
the  like  class  of  the  said  (corporation) 

and  if  any  such  stock  is  preferred  the  shares  of  the  Associa- 
tion issued  for  such  shall  have  the  same  preference  and  be  is- 
sued share  for  share. 

WHEREAS  the  object  of  said  Association,  in  addition  to 
the  objects  set  forth  in  said  Declaration  of  Trust,  shall  be  to 
acquire  and  become  the  owner  of  at  least  a  majority  of  the  issued 
capital  stock  of  the  said  (corporation). 

WHEREAS  the  Subscribers  are  willing  and  desirous  to  sell, 
transfer  and  assign  their  said  respective  shares  in  said  cor- 
poration to  the  Organizers,  for  and  in  consideration  and  upon 
the  basis  of  exchange  hereinafter  specified: 

NOW  THEREFORE,  in  consideration  of  the  premises,  and 
in  further  consideration  of  the  sum  of  One  Dollar,  to  each  of 
the  Subscribers  by  the  Organizers  in  hand  paid,  the  receipt  of 
which  by  each  of  the  Subscribers  is  hereby  respectively  acknowl- 
edged, the  Subscribers  do  hereby  severally,  but  not  jointly,  agree 
to  and  with  the  Organizers  as  follows : 

1.  The  Subscribers  do  hereby  severally  agree  to  sell  to  the 
Organizers  the  number  of  shares  of  capital  stock  of  the  said 

(corporation)   to  the  amount  set 

opposite  their  respective  names  or  stated  in  the  certificates  of 
deposit  issued  to  them  respectively  by  the  Depository  as  here- 
inafter provided,  it  being  understood  and  agreed  that  such 
holders  of  stock  shall  in  all  cases  deposit  the  certificates  for 
their  stock,  and  also  such  transfers,  assignments  and  powers  of 
attorney  as  may  be  required  by  the  Organizers  in  order  to  vest 
in  said  Organizers,  and  to  enable  them  to  transfer  the  complete 
322 


REORGANIZATION    FROM    INCORPORATION. 

and  absolute  title  to  said  stock,  and  the  Subscribers  agree  re- 
spectively at  any  time  on  demand  of  the  Organizers  to  execute 
any  and  all  other  transfers,  assignments  and  writings  required 
for  vesting  the  complete  ownership  of  the  stock  hereunder  in 
the  Organizers  or  their  nominee,  for  the  purpose  of  enabling 
the  Organizers  to  carry  out  the  purposes  of  this  agreement. 

2.  The  Depository  shall  issue  to  the  Subscribers  so  deposit- 
ing their  stock,  its  certificates  of  deposit  therefor,  specifying  the 
amount  and  kind  of  stock,  said  certificates  to  entitle  the  holders 
thereof  to 

(1)  a  return  of  their  stock  in  the 

(corporation)  on  or  before  ,  or  such  later 

date  as  may  be  fixed,  as  hereinafter  provided,  in  case  of  the 
failure  of  the  Organizers  to  carry  out  the  purpose  of  this  agree- 
ment, or 

(2)  in  the  event  of  the  plan  being  by  the  Organizers  or  one 
of  them  declared  in  writing  to  the  Depository  to  be  operative 
and  in  force,  then  to  the  amounts  of  shares  of  the  Association 
set  forth  in  the  holders'  certificates  of  deposit  respectively. 

All  rights  of  such  Subscribers  in  respect  of  such  deposits  shall 
be  such  only  as  shall  be  evidenced  by  their  respective  certificates 
of  deposit;  and  therefore  the  holder  of  any  such  certificate  or 
of  any  certificate  issued  in  lieu  thereof,  or  in  exchange  there- 
for, shall  be  subject  to  this  agreement,  and  entitled  to  have, 
and  exercise,  the  rights  of  the  original  Subscribers  under  the 
certificate  issued  to  him  or  her  in  respect  of  the  securities 
therein  mentioned,  and  these  rights  shall  pass  to  any  executor 
or  administrator  of  a  Subscriber  in  the  same  manner  as  though 
such  were  certificates  of  stock,  without  any  formal  transfer  what- 
ever. 

By  accepting  any  such  certificate,  every  recipient  or  holder 
thereof  shall  thereby  become  a  party  to  this  agreement,  with  the 
same  force  and  effect  as  though  an  actual  Subscriber  hereto. 
Until  a  deposit  shall  have  been  fully  completed  hereunder,  and 

323 


EXHIBITS. 

a  certificate  therefor  actually  issued  to  the  depositor,  neither 
the  depositor  nor  any  one  claiming  under  him  or  her  shall  have 
any  right  hereunder,  and  then  only  as  specified  in  such  certifi- 
cate. 

3.  For  shares,  so  deposited  hereunder,  the  amount  of  the 
stock  of  which  hereinafter  required  to  make  this  plan  operative, 
shall  have  been  so  deposited  as  aforesaid  the  Depository  shall, 
when  this  agreement  shall  have  become  operative,  and  when  and 
as  the  new  securities  shall  have  been  received  by  the  Depository 
from  the  Organizers,  deliver  to  the  Subscribers,  or  to  such  other 
persons  as  shall  be  entitled  thereto,  the  following : — 

For  every  share  of  common  stock  of  the 

(corporation)  common  shares  of  the  Association  to 

be  originally  issued. 

4.  To  make  this  agreement  binding,  operative  and  effective, 
there  must  have  been  deposited  hereunder  at  least 

shares  of  the  (corporation). 

5.  is  hereby  fixed  as  the  date  of  the 
expiration  of  the  time  for  the  deposit  of  the  shares,  but  such 
time  may  be  extended  not  exceeding  Thirty  days  thereafter,  by 
agreement  between  the  Organizers  and  the  Depository,  and  in 
case  the  Organizers  shall  not  notify  the  Depository  that  they 
are  ready  to  complete  the  purchase  of  the  shares  within  thirty 
days  after  said  ,  the  shares  deposited 
hereunder  shall  be  returned  by  the  Depository  without  charge 
to  the  depositors  of  the  same,  respectively,  or  to  the  holders  of 
said  certificates  of  deposit,  upon  the  surrender  to  the  Depository 
of  said  certificates  of  deposit,  duly  endorsed. 

6.  When  the  Organizers  or  any  of  them  declare  in  writing 
to  the  Depository  the  plan  herein  contemplated  to  be  operative, 
the  said  Subscribers,  for  the  consideration  aforesaid,  do  further 
nominate  and  appoint  their  true  and  law- 
ful attorney  irrevocable,  to  transfer  to  the  order  of  said  Organ- 
izers the  said  respective  shares  of  stock  of  the 

and  further  agree  that  the  delivery  to  the  said  Depository  by 
324 


REORGANIZATION    FROM    INCORPORATION. 

said  Organizers  of  the  said  respective  shares  in  said  Associa- 
tion, shall  be  accepted  in  full  payment  for  said  shares,  and  con- 
stitute an  absolute  and  irrevocable  sale  of  the  said  stock  of  the 
(corporation)   and  that  thereafter  all  the 

Subscribers'  rights  shall  be  only  those  secured  to  him  or  her  as 
a  shareholder  in  said  Association  as  shall  be  described  in  said 
Declaration  of  Trust. 

7.  In  the  event  of  the  death  of  any  of  said  Organizers,  the 
survivors  or  survivor  shall  succeed  to  all  the  rights  and  powers 
of  the  deceased,  and  may  proceed  to  carry  out  said  agreement. 

8.  The   Depository  aforesaid  agrees  to  receive   said  shares 
of  said  (corporation)   stock,  to  hold 
and  deliver  under  the  terms  of  this  agreement. 

9.  The    organizers,    in  consideration  of    the    premises    and 
promises  above  set  forth,  agree  to  use  their  best  efforts  to  carry 
out  and  complete  the  organization  of  said  Voluntary  Association, 
and  the  execution  of  the  plan  contemplated  in  this  instrument. 

IN  WITNESS  WHEREOF,  the  said  Organizers  have  hereto 
affixed  their  signatures,  and  the   Depository   has  caused  these 
presents  to  be  signed  in  its  name  and  behalf  by 
its  ,  and  its  corporate  seal  to  be  hereto  af- 

fixed, and  the  Subscribers  either  have  affixed  their  signatures 
hereto  or  to  an  instrument  of  which  the  within  is  a  copy,  and 
have  deposited  the  respective  number  of  shares  of  the  stock  of 
the  (corporation)  held  by  them  with 

the  Depository,  under  the  terms  of  this  instrument. 

Bank,  by  Cashier. 


Organizers. 


SUBSCRIBERS. 

Signature.  Number  of  Shares. 

325 


FORM  OF  TRUST  TAKING  OVER  CORPORATION. 

Agreement  and  Declaration  of  Trust 
of  the 

Company. 

THIS  AGREEMENT  made  and  entered  into  this 
day  of  A.  D.  191       ,  by  and  between 

Trustees,  and  the  Bank,  the  Depository. 

WHEREAS,  the  Bank,  the  Depository 

above  named,  has  transferred  to  the  Trustees,  certain  property, 
to  wit : —  shares  being  more  than  a  majority 

of  the  shares  of  the  capital  stock  of  the 

Company,  a  corporation  duly  organized  and  existing  under  the 
laws  of  the  Commonwealth  of  Massachusetts,  and 

WHEREAS,  the  Trustees  have  issued    to    the    Depository 
negotiable  certificates  to  the  amount  of  shares, 

representing  the  entire  beneficial  interest  in  the  property,  the 
legal  title  to  which  has  been  vested  in  the  Trustees,  the  same 
to  be  given  to  the  subscribers  to  the  agreement,  dated 
191  ,  under  the  authority  of  which  this  Declaration  of  Trust 
has  been  entered  into,  and  to  such  others  as  may  become  bene- 
ficially interested  herein  as  Cestuis  que  Trustent,  and 

WHEREAS,  it  is  the  purpose  and  intention  that  the  business 

of  said  Trust  shall  be  to  own  and  acquire  at  least  a  majority  of 

the  issued  and  outstanding  shares  of  the  capital  stock  of  the 

Company  (corporation)  and  such  of  the 

properties  and  assets  of  said  corporation  as  may  from  time  to 
time  be  deemed  expedient,  and  to  engage  in  and  conduct  the  busi- 
ness heretofore  conducted  by  said  corporation  any  other  business 
such  as  by  the  Trustees  may  be  considered  advisable,  and  tend- 
ing to  enhance  the  value  of  the  shares  of  the  Trust ;  to  participate 
in  the  benefits  of  the  same,  as  Cestuis  que  Trustent,  ratably  ac- 
cording to  their  several  holdings  of  shares  and  subject  to  their 
326 


TRUST    SUCCESSOR   TO    CORPORATION. 

respective  rights,  including  herein  not  only  such  property  as  has 
been  transferred  to  the  Trustees,  but  all  such  further  and  addi- 
tional property  as  may  be  acquired  by  the  Trustees  under  the 
authority  herein  conferred. 

NOW  THEREFORE,  the  Trustees  declare  that  they  hold  the 
property  and  assets  that  have  been  acquired  under  the  foregoing 
provisions,  together  with  all  such  property  and  assets  as  may  be 
hereafter  acquired,  in  trust,  the  same  to  manage,  invest,  reinvest 
and  dispose  of,  as  follows,  to  wit: — 

ARTICLE  I. 

The  Trustees  herein  named,  and  those  that  shall  from  time  to 
time  be  elected  under  the  provisions  of  the  Articles  of  Agree- 
ment and  this  Declaration  of  Trust,  in  their  collective  capacity, 
shall  be  designated  as,  and  act  under  the  name  of 

ARTICLE   II. 

The  beneficial  interest  in  this  Association  and  its  business  and 
assets  is  divided  into  common  shares  of  no 

nominal  or  par  value,  as  shown  and  set  forth  in  the  negotiable 
certificates  issued  by  the  Depository.  The  Trustees  may,  at  any 
time,  under  the  authority  of  a  vote  of  a  majority  of  the  holders 
of  the  common  shares,  at  a  meeting  duly  called  and  held  for 
the  purpose,  cause  to  be  issued  negotiable  certificates  or  evidences 
of  interest,  as  Cestuis  que  Trustent,  additional  shares,  describe 
what  class,  whether  preferred  or  common,  they  shall  represent, 
and  under  what  terms  and  conditions  they  shall  be  issued,  and 
at  what  prices  they  shall  be  sold. 

The  Trustees,  for  the  payment  of  dividends  or  for  any  other 
purpose,  are  not  required  to  recognize  as  a  shareholder,  any  one 
whose  name  does  not  appear  as  such  upon  the  books  of  the 
Association  kept  for  the  purpose.  In  connection  with  the  trans- 
fer of  shares  of  this  Association,  certificates  already  issued  and 
outstanding,  with  duly  executed  authority  for  the  purpose,  must 

be  surrendered  for  cancellation. 

327 


EXHIBITS. 
ARTICLE  III. 

The  number  of  the  Trustees    of    this    Association    shall    be 

to  hold  until  the  next  annual  meeting, 
until  the  second  annual  meeting,  until 

the  third  annual  meeting. 

At  each  annual  meeting,  the  shareholders  shall  elect  a  sufficient 
number  to  fill  vacancies,  whether  for  the  full  term  of  three  years, 
or  for  one  of  the  shorter  terms.  Each  Trustee  shall  hold  office 
until  his  successor  is  duly  elected  and  qualified.  Vacancies  in 
any  of  the  offices  of  Trustees  which  may  arise  between  meetings, 
shall  be  filled  by  the  remaining  or  surviving  Trustees  or  Trustee, 
the  new  Trustee  or  Trustees  to  hold  until  the  next  annual  meet- 
ing. 

Any  of  the  Trustees  may  resign,  in  which  case  the  legal  title 
to  the  property  and  business  of  the  Association  shall  pass  to 
the  succeeding  Trustees  without  any  formal  transfer. 

In  the  event  that  all  the  Trustees  of  this  Association  shall  have 
resigned  or  deceased,  leaving  no  Trustee  surviving,  the  legal 
title  to  the  property  and  business  thereof,  shall  be  vested  in  the 
executors  and  administrators  of  the  deceased  Trustees,  pending 
the  election  of  new  Trustees,  and  when  the  latter  are  elected, 
the  property  formerly  held  by  the  deceased  Trustees,  shall  vest 
in  them.  Should  the  offices  of  all  the  Trustees  become  vacant  by 
death,  resignation  or  otherwise,  Shareholders  may  cause  a  special 
meeting  of  their  members  to  be  called  and  held,  to  elect  new 
Trustees  to  fill  the  vacancies. 

ARTICLE  IV. 

The  Trustees  shall  have  and  hold  the  legal  title  to  the  prop- 
erty of  the  Association,  and  have  the  exclusive  management  and 
control  of  the  same ;  the  Trustees  may  hold  equitable  titles  should 
occasion  require. 

They  shall,   as   Trustees    hereunder,   but   not   personally,    as- 
sume all  contracts,  obligations,  and  liabilities  in  connection  with, 
328 


TRUST  SUCCESSOR  TO  CORPORATION. 

or  arising  out  of,  the  acquiring  of  the  property  hereinbefore  re- 
ferred to  as  assigned  and  conveyed  to  them;  and  as  such  Trus- 
tees, but  not  personally,  to  the  extent  of  the  value  of  the  same, 
agree  to  hold  the  Depository  harmless  and  indemnified  from  and 
against  any  damage,  expense,  or  liability  upon,  by  reason  of,  or 
in  connection  with  the  same.  They  may  adopt  and  use  a  com- 
mon seal ;  they  shall  have  power  to  vote  in  person  or  by  proxy 
upon  all  shares  of  stock  at  any  time  belonging  to  the  Trust ;  they 
may  collect,  receive  and  receipt  for  any  dividends  thereon;  they 
may  collect,  bring  suit,  receive  and  receipt  for  any  sums  of  money 
becoming  due  to  said  Trust;  they  may  employ  counsel;  may 
begin,  defend,  and  settle  suits  at  law  or  in  equity.  They  may, 
from  time  to  time,  borrow  money  and  issue  notes  or  other  obliga- 
tions, except  bonds,  to  evidence  such  debts,  but,  except  by  vote 
of  the  holders  of  a  majority  of  the  common  shares  of  the  Trust, 
issued  and  outstanding,  they  shall  not  borrow  money  in  excess  of 
the  sum  of  dollars.  Except  for  the  pur- 

pose of  qualifying  persons  to  act  as  Directors  or  officers  of  cor- 
porations, they  shall  not  mortgage  or  pledge  any  property  of  the 
Trust  or  issue  bonds  of  the  Trust  except  upon  such  terms  and 
for  such  purposes  as  may  be  approved  by  the  holders  of  at  least 
two  thirds  of  the  common  shares  of  the  Trust  then  issued  and 
outstanding,  given  at  an  annual  meeting  of  the  shareholders  or 
at  .a  special  meeting  called  and  held  for  that  purpose. 

So  far  as  strangers  to  this  Trust  are  concerned,  a  resolution  of 
the  Trustees  authorizing  a  particular  act  to  be  done  shall  be  con- 
clusive evidence  in  favor  of  such  strangers  that  such  act  is  within 
the  power  of  the  Trustees,  and  no  purchaser  from  the  Trustees 
shall  be  bound  to  see  to  the  application  of  the  purchase  money 
or  other  consideration  paid  or  delivered  by  or  for  said  purchaser 
to  or  for  said  Trustees.  For  the  purpose  of  establishing  as  to 
strangers  to  the  Trust  the  succession  of  the  Trustees  and  the 
titles  of  the  Trustees  from  time  to  time  to  any  property  of  the 
Trust,  whenever  any  change  shall  occur  in  the  personnel  of  the 
Trustees  an  affidavit  of  the  remaining  Trustees  or  any  one  of 
them  recorded  with  the  County, 

329 


EXHIBITS. 

Registry  of  Deeds,  or  in  the  event  of  the  death  of  all  the  Trustees 
an  affidavit  of  an  executor  of  a  deceased  Trustee  shall  be  suffi- 
cient and  conclusive  evidence  as  to  such  strangers,  that  the  change 
in  personnel  of  the  Trustees  has  taken  place,  that  the  Trustee 
or  Trustees  as  named  therein  have  retired  as  Trustees  and  that 
the  new  successor  Trustee  or  Trustees  have  succeeded  to  all  the 
authority  formerly  possessed  by  the  retired  Trustee  or  Trustees, 
all  as  therein  set  forth,  and  that  the  Trustees  then  qualified  to 
act  are  as  set  forth  therein. 

ARTICLE  V. 

Meetings  of  the  Trustees  shall  be  held  at  the  office  of  the  Com- 
pany in  or  at  such  other  convenient  place 
as  may  be  agreed  upon  by  them,  on  the  days  of 
in  each  year  and  at  such  other  times  as 

the  President  or  at  least  two  of  the  Trustees  may  request.  Notice 
of  such  meeting,  regular  or  special,  shall  be  mailed  or  delivered 
to  each  Trustee  at  least  days  before  such  meet- 

ing is  to  be  held. 

A  majority  of  the  Trustees  shall  constitute  a  quorum  for  the 
transaction  of  any  business  that  may  lawfully  come  before  any 
meeting,  and  the  vote  of  a  majority  of  the  Trustees  present  and 
acting  at  any  meeting  shall  be  conclusive  and  binding  upon  the 
Trustees  and  this  Association. 

A  certificate  of  the  Secretary  shall  be  conclusive  as  to  the 
regularity  of  any  meeting,  of  those  present  thereat,  and  of  the 
result  of  any  action,  vote  or  resolution  that  may  have  been  taken 
or  adopted  at  such  meeting. 

The  Trustees  may  make,  adopt,  amend  or  repeal  such  by-laws, 
rules  and  regulations  not  inconsistent  with  the  terms  of  this 
instrument  as  they  may  deem  necessary  or  desirable  for  the 
conduct  of  their  business  and  for  the  government  of  themselves 
and  their  agents,  servants  or  representatives. 
330 


TRUST    SUCCESSOR    TO    CORPORATION. 
ARTICLE  VI. 

The  Trustees  shall  elect  a  President  at  each  annual  meeting, 
from  their  own  number,  and  also  a  Treasurer  and  Secretary,  and 
have  full  power  and  authority,  to  appoint  and  employ  all  such 
other  officers,  agents,  servants  and  attorneys  as  they  may  deem 
necessary  or  expedient;  to  fill  vacancies  in  the  elective  or  ap- 
pointive offices  wherever  any  vacancies  may  occur,  and  make  tem- 
porary appointments  during  the  absence  of  any  regular  appointee. 

The  President,  Treasurer  and  Secretary  shall  have  such 
authority  and  perform  such  duties,  and  receive  such  compensa- 
tion as  may  from  time  to  time  be  determined  by  the  Trustees,  the 
Secretary  to  keep  accurate  written  records  and  to  be  sworn. 

The  Trustees  shall  fix  the  compensation,  if  any,  of  all  officers 
and  agents  whom  .they  may  appoint,  and  are  likewise  authorized 
to  pay  to  themselves  as  trustees  such  compensation  for  their  own 
services  as  they  may  deem  reasonable;  but  any  trustee  may  be 
employed  by  the  trustees  to  perform  any  special,  legal,  financial 
or  other  service,  and  may  be  elected  or  appointed  to  any  office, 
and  shall  in  any  such  case  be  entitled  to  receive  such  additional 
compensation  as  the  trustees  may  fix  and  determine.  Any  trustee 
may  acquire,  hold,  own,  and  dispose  of  shares  in  the  Trust  in 
his  individual  name  and  on  his  personal  account,  or  jointly  with 
other  persons,  or  as  a  member  of  a  firm,  without  being  thereby 
disqualified  to  act  as  Trustee ;  and  while  so  owning  and  holding 
any  Trust  shares  on  his  personal  account  shall  be  entitled  to  all 
and  the  same  rights  and  privileges  of  and  as  any  other  share- 
holder. The  Trustees  may  also  appoint  from  among  their  num- 
ber committees  to  whom  they  may  delegate  such  of  the  powers 
herein  conferred  upon  the  Trustees  as  they  may  deem  expedient. 

The  Trustees  shall  not  be  liable  for  errors  of  judgment  in  ac- 
quiring, managing,  holding,  or  transferring  any  of  the  property 
of  this  Trust,  either  that  originally  conveyed  to  them  or  that  here- 
after acquired,  nor  for  any  loss  arising  out  of  any  investment, 
nor  for  any  act  or  omission  to  act,  performed  or  omitted  by  them 
in  the  execution  of  this  Trust  in  good  faith;  nor  shall  they  nor 

331 


EXHIBITS. 

any  or  either  of  them  be  liable  for  the  acts  or  omissions  of  each 
other  or  of  any  officer,  agent,  or  servant  appointed  by  or  acting 
for  them,  and  they  shall  not  be  obliged  to  give  any  bond  to 
secure  the  due  performance  of  this  Trust  by  them.  Provided, 
in  the  management  and  the  conduct  of  the  business  of  this  Trust, 
it  shall  be  claimed  by  any  party  or  adjudged  by  a  court  of  com- 
petent jurisdiction  that  the  said  Trustees,  or  any  of  them,  are 
liable  personally  for  any  act  or  omission  to  act  on  their  part, 
or  on  the  part  of  any  officer,  agent  or  servant  appointed  by  or 
acting  for  them,  in  connection  with  their  holding  and  managing 
the  property  of,  or  carrying  on  the  execution  of  this  Trust  in 
good  faith,  whether  such  claim  or  judgment  be  in  the  nature 
of  damage  for  a  tort,  or  in  the  nature  of  a  decree  of  a  fine  in 
criminal  proceedings,  being  in  either  case  a  claim  for  a  debt, 
damage,  judgment  or  decree,  for  which  they,  or  any  of  them, 
would  otherwise  be  liable  personally,  they  are  hereby  expressly 
authorized  to  treat  such  claim,  judgment,  or  decree  as  though  the 
same  were  in  the  nature  of  a  stipulated  sum  based  upon  an  ex- 
press contract  for  which  the  property  in  their  hands  as  Trustees 
would  be  liable,  and  to  pay  the  same  from  the  property  of  the 
Trust,  and  they  are  expressly  authorized  to  enter  into  contracts 
of  insurance  with  such  party  or  parties  as  they  may  deem  exped- 
ient for  their  proper  personal  protection  against  such  liabilities. 

ARTICLE  VII. 

The  original  issue  of  the  shares  of  this  Association  shall  be 

common,  but  nothing  herein  shall  prevent  the 

shareholders,  by  vote  of  a  majority  of  the  shares  at  a  meeting 

called  for  the  purpose,  authorizing  the  issue  of  additional  shares. 

The  certificates  to  be  used  by  the  Trustees  for  the  issue  of 
original  or  subsequent  shares  shall  be  substantially  as  per  form 
annexed  to  this  Declaration  of  Trust. 

ARTICLE  VIII. 

Whenever  it  shall  have  been  voted  to  increase  the  number  of 
authorized  issue  of  shares  beyond  the  amount  of  the  original 
issue,  the  Trustees  shall  give  written  notice  to  each  of  the  share- 
332 


TRUST  SUCCESSOR  TO  CORPORATION. 

holders,  of  the  proposed  issue  and  each  holder  of  common  shares 
shall  be  entitled  to  take  at  the  same  valuation  that  proportion 
of  the  new  shares  to  be  issued  which  his  holding  of  common 
shares  issued  and  outstanding  bears  to  the  total  number  of  new 
common  shares  to  be  issued ;  and  be  entitled  to  subscribe  in  writ- 
ing within  thirty  days  from  the  time  of  the  notice  at  the  price 
fixed  by  the  shareholders  for  each  new  common  share,  to  be  payable 
in  cash  upon  the  issue  of  the  certificate.  If,  after  thirty  days, 
any  of  the  new  shares  remain  unsubscribed  for  the  Trustees  are 
authorized  to  sell  the  same  on  such  terms  and  conditions  as  may 
to  them  seem  advisable. 

Unless,  and  until  all  of  the  proposed  issue  of  new  shares  shall 
have  been  subscribed  for  or  sold,  the  Trustees  are  under  no 
obligation  to  issue  any  of  them,  and  to  this  end,  the  Trustees  may 
reserve  the  right  of  delivering  and  demanding  payment  for  the 
new  shares,  or  of  withdrawing  the  issue  from  subscription. 

A  Trustee  may,  individually  or  jointly  with  others,  purchase 
any  additional  shares  of  the  Trust  as  issued. 

ARTICLE  IX. 

In  the  event  of  the  loss  or  destruction  of  a  certificate,  a  new 
one  may  be  issued,  on  such  terms  as  the  Trustees  may  prescribe. 

ARTICLE  x. 

DIVIDENDS.  The  Trustees  may,  from  time  to  time,  declare 
and  pay  dividends  upon  the  shares  of  the  Trust  out  of  the  income 
from  time  to  time  received  by  them  from  the  management  of  the 
Trust.  The  amount  of  such  dividends  upon  the  Trust  shares  and 
the  payment  of  them  shall,  however,  be  wholly  in  the  discretion 
of  the  Trustees,  and  subject  always  to  the  priorities  and  prefer- 
ences of  any  preferred  shares  which  may  be  issued  over  the  com- 
mon shares ;  and  the  Trustees  shall  have  full  power  and  authority, 
except  as  herein  limited,  to  determine  what  portions  of  any  re- 
ceipts or  expenditures  shall  fairly  be  considered  as  income,  and 

333 


EXHIBITS. 

they  shall  have  the  authority  to  reserve,  as  they  may  deem  fit, 
such  a  sum  from  the  gross  income  actually  collected  as  a  reserve 
or  surplus  fund,  with  power  to  invest  the  same,  or  the  proceeds 
thereof,  in  such  form  as  they  may  determine,  and  they  may 
change  their  determination  as  to  such  funds  or  investments,  or 
any  part  thereof,  from  time  to  time,  as  to  them  shall  seem  prudent 
and  expedient,  absolutely  at  their  own  discretion. 

ARTICLE   XI. 

The  fiscal  year  of  the  business  of  this  Association  shall  begin 
and  end  of  each  year. 

ARTICLE   XII. 

The  annual  meeting  of  the  shareholders  shall  be  held  at  the 
office  of  the  Company  at  on  the 

day  of  in  each  year,  the  first  meeting  to  be 

held  in  of  19 

Notice  in  writing  of  the  annual  meeting  shall  be  mailed,  postage 
prepaid,  by  the  Secretary  to,  or  be  served  in  person  upon,  each 
shareholder  of  record  as  shown  by  the  books  of  the  Company,  at 
least  seven  days  before  each  meeting. 

The  notice  of  the  annual  meeting  need  contain  no  statement  of 
the  business  to  be  transacted  thereat,  and  all  shareholders  shall 
be  held  to  recognize  that  at  such  meeting  any  action  authorized 
under  the  terms  of  this  Declaration  of  Trust  and  of  the  Agree- 
ment of  which  it  forms  a  part  may  be  taken  by  the  Shareholders. 

Special  meetings  of  the  Shareholders  may  be  called  and  held  on 
seven  days'  notice  to  be  given  by  the  Secretary  as  in  the  case  of 
the  annual  meeting,  at  the  direction  of  the  President  or  upon  the 
request  of  a  majority  of  the  Trustees,  or  of  shareholders  repre- 
senting at  least  shares.  At  special  meetings,  no 
business  shall  be  transacted  excepting  such  as  is  contained  in  the 
notice  of  the  meeting,  excepting  to  adjourn.  At  all  meetings  each 
shareholder  shall  be  entitled  to  one  vote  for  each  share  held  by 
him  in  the  Association.  Any  shareholder  may  vote  by  proxy. 
334 


TRUST    SUCCESSOR   TO    CORPORATION. 

A  quorum  for  the  transaction  of  business  shall  consist  of  a 
majority,  to  be  represented  in  person  or  by  proxy,  of  the  shares 
of  the  Association.  A  less  number  may  adjourn  a  meeting. 

No  notice  of  any  regular  or  special  meeting  of  the  shareholders 
need  be  given,  provided  all  the  registered  shareholders  are  present 
thereat  in  person  or  by  proxy,  or  have  in  writing  waived  notice 
of  the  meeting. 

ARTICLE   XIII. 

The  death  of  a  shareholder  or  Trustee  during  the  continuance 
of  this  Trust  shall  not  operate  to  determine  the  Trust,  nor  shall 
it  entitle  the  legal  representative  of  the  deceased  shareholder  to 
an  accounting,  or  to  take  any  action  in  the  courts,  or  elsewhere, 
against  the  Trustees ;  but  the  executors,  administrators  or  assigns 
of  any  deceased  shareholder  shall  succeed  to  the  rights  of  said 
decedent  under  this  Trust  upon  the  surrender  of  the  certificate  for 
shares  owned  by  him.  The  ownership  of  shares  hereunder  shall 
not  entitle  the  shareholders  to  any  title  in  or  to  the  Trust  prop- 
erty whatsoever,  or  the  right  to  call  for  a  partition  or  division  of 
the  same.  And  it  is  expressly  declared  and  agreed  that  the 
shareholders  are  Cestuis  que  Trustent,  and  hold  no  other  relation 
to  the  Trustees  than  that  of  Cestuis  que  Trustent  hereunder. 

ARTICLE   XIV. 

The  Trustees  shall  have  no  power  to  bind  the  shareholders  per- 
sonally, and  the  shareholders  and  their  assigns  and  all  parties 
whatsoever  extending  credit  to,  contracting  with,  or  having  any 
claim  against  the  Trustees  shall  look  only  to  the  funds  and  prop- 
erty of  the  Trust  for  payment  under  such  contract  or  claim,  or 
for  the  payment  of  any  debt,  damage,  judgment  or  decree;  or 
of  any  money  or  property  that  may  otherwise  be  or  become  due, 
payable  or  transferable  to  them  from  the  Trustees,  so  that  neither 
the  Trustees  nor  the  shareholders  at  any  time  shall  be  personally 
liable  for  such.  In  every  written  order,  contract  or  obligation 
which  the  Trustees  by  themselves  or  by  any  officer  or  agent  shall 
give  or  enter  into,  it  shall  be  the  duty  of  the  Trustees  to  refer  to 

335 


EXHIBITS. 

this  declaration  and  to  stipulate  that  neither  the  Trustees  nor  the 
shareholders  shall  be  held  to  any  personal  liability  under  or  by 
reason  of  said  order,  contract  or  obligation.  For  the  purpose  of 
protecting  themselves  as  Trustees  against  any  personal  liability 
hereunder,  they  are  expressly  authorized  as  Trustees  to  enter  into 
such  contracts  of  insurance  as  to  them  may  seem  expedient  or 
advisable. 

ARTICLE  xv. 

The  original  of  this  declaration  of  trust  and  any  amendments 
hereafter  made  shall  be  filed  for  record  in  the  office  of  public 
records  in  the  county  of 

in  this  state,  and  after  the  same  has  been  recorded  it  shall  be 
kept  for  safety  in  such  depository  as  the  said  trustees  may 
from  time  to  time  select. 

ARTICLE   XVI. 

TERM  OF  TRUST.  This  trust  shall  continue  for  the  term  of 
twenty  years  after  the  death  of  the  last  survivor  of  the  following 
named  persons,  to  wit : — 

At  the  expiration  of  which  term  or  at  such  earlier  time  as  the 
holders  of  at  least  two  thirds  of  the  common  shares  then  out- 
standing may,  at  a  meeting  called  for  that  purpose,  by  vote  or 
resolution  appoint,  the  then  trustees  shall  terminate  this  trust 
by  selling  all  property  then  held  by  them  as  such  trustees  and 
dividing  the  proceeds  thereof  among  the  shareholders  according 
to  their  respective  holdings  and  in  accordance  with  and  subject 
to  the  respective  rights  and  priority  of  the  holders  of  preferred 
shares  and  of  common  shares  as  hereinbefore  expressed.  Pro- 
vided, however,  that  upon  the  request  of  the  holders  of  at  least 
two  thirds  of  the  common  shares  then  outstanding,  by  vote  and 
resolution  thereof,  at  a  meeting  of  the  shareholders  called  and 
held  for  that  purpose,  the  trustees  may,  if  it  seems  to  them 
judicious  so  to  do,  convey  the  trust  property  to  new  or  other 
trustees  or  to  a  corporation,  according  to  the  terms  of  such 
request  and  in  the  manner  stated  therein,  being  first  duly  in- 
336 


FORM    OF    RUBBER    STAMP    USED   ON    CONTRACTS. 

demnified    for    any    outstanding    obligations;     and     the     then 
trustees,  upon  filing  with  the  County, 

Registry  of  Deeds,  their  certificate,  or  that  of  a 
majority  of  their  number,  that  they  have  complied  with  such  re- 
quest, shall  be  under  no  further  obligations,  provided  further, 
however,  that  it  is  especially  understood  and  agreed  that  nothing 
in  these  provisions  contained  shall  be  considered  as  making  it 
obligatory  upon  the  trustees  to  comply  with  such  request.1  For  the 
purpose  of  winding  up  its  affairs  and  liquidating  the  assets  of 
the  Trust,  the  then  Board  of  Trustees  shall  continue  in  office  until 
such  duties  have  been  duly  performed. 

ARTICLE   XVII. 

AMENDMENT  OF  DECLARATION  OF  TRUST.  This 
Agreement  and  Declaration  of  Trust  may  be  added  to,  except  as 
regards  the  liability  of  the  trustees  and  except  as  regards  the  con- 
tract between  the  trustees  and  the  shareholders  as  to  the  issue  and 
disposition  of  new  common  shares  and  except  as  to  the  respective 
rights  of  the  holders  of  preferred  and  common  shares,  at  any 
annual  or  special  meeting  of  the  shareholders  by  vote  or  resolu- 
tion of  the  holders  of  at  least  a  majority  of  the  common  shares 
then  outstanding,  provided  that  notice  of  the  proposed  alteration 
or  addition  shall  have  been  given  in  the  call  for  the  meeting  and 
that  the  same  is  not  inconsistent  with  the  acquired  rights  of  any 
third  person  or  the  preferential  rights  of  the  holders. 

ARTICLE   XVIII. 

In  case  any  addition,  or  Amendment  to  this  Declaration  of 
Trust  is  made  by  the  Shareholders,  a  copy  thereof,  duly  certified 
by  the  Secretary,  is  to  be  added  to  the  Declaration  of  Trust  and 
filed  with  the  Depository  herein  named,  and  any  other  depository 
where  the  original  Declaration  is  filed  as  provided  herein. 

Form  of  Rubber  Stamp  Used  on  Contracts. 

This  contract  is  made  and  entered   into  on  the  part  of  the 
Company,  the  Trustees,  under  such  designa- 

!As  to  validity  or  not  of  this  proviso  see  §§  96,  97,  171. 

337 


EXHIBITS. 

tion,  and  any  officer  or  agent  of  the  same,  strictly  in  accordance 
with  the  terms  of  a  Declaration  of  Trust  signed  by  the  Trustees 
under  the  same,  dated  and  recorded  in  the 

registry  of  public  records  Book  page 

in  the  county  of  state  of 

which  is  hereby  referred  to  and  made  a  part  of  this  agreement. 
As  provided  therein,  all  parties  whatsoever  entering  into  any  con- 
tract with  the  Trustees,  shall  look  only  to  the  funds  and  property 
of  the  Trust,  and  in  no  event  to  the  Trustees  or  shareholders  per- 
sonally, for  payment  of  the  same. 


338 


EXHIBITS. 
CERTIFICATE  WITHOUT  PAR  VALUE. 

Shares.  Shares. 

Total  Number  of  Shares  1,500,000. 
No Shares  

GREAT  NORTHERN  IRON  ORE  PROPERTIES. 

Trustees  Certificate  of  Beneficial  Interest. 
The  undersigned,  as  trustees  under  a  certain  indenture  entered 
into  between  them  and  the  Lake  Superior  Company,  Limited, 
on  the  seventh  day  of  December,  A.  D.  One  Thousand,  Nine 
Hundred  and  Six,  do  hereby  certify  that 

is  the  owner  of Shares  of  the 

beneficial  interest  therein  specifically  described.  This  certificate 
is  transferable  only  upon  the  books  of  the  trustees  in  person  or 
by  attorney  and  upon  the  surrender  of  this  certificate.  This  cer- 
tificate shall  not  become  valid  until  countersigned  by  the  Registrar 
of  Transfers. 

In  Testimony  Whereof,  the  trustees  have  signed  this  certifi- 
cate this day  of ,  A.  D 


Trustees. 


By. 


Trustees  and  Attorneys  for  the  Other  Trustees. 

Countersigned  and  registered  this day  of 

,  19 

TRUST  COMPANY, 

Registrar  of  Transfers. 
By .,  Secretary. 


339 


PLAN  OF  THE  MERCHANTS'  BANK. 

Note. — The  following  is  taken  from  the  "Works  of  Hamil- 
ton" as  published  under  order  of  Congress  (Vol.  VII,  pp.  838- 
844),  and  is  referred  to  by  Senator  Verplanck  in  Warner  v. 
Beers  (1804),  23  Wend.  103,  151;  see  Section  80  of  this  book. 
If  we  change  the  words  "directors"  to  "trustees",  "stockholders" 
to  "cestuis  que  trust"  and  the  general  title  of  "limited  partner- 
ship" to  "trust",  we  have  a  perfect  example  of  the  method  of 
business  organizations  considered  in  this  book.  The  Merchants' 
Bank  operated  under  this  instrument  as  drawn  by  Alexander 
Hamilton  until  forced  to  comply  with  a  "Restraining  Act  of 
1804"  passed  by  the  New  York  Legislature  and  described  in 
"Paine's  Banking  Laws,"  page  13,  as  follows:  "It  enacted  that 
from  and  after  the  passing  of  this  act,  no  person  unauthorized 
by  law  should  subscribe  to  or  become  a  member  of  any  associa- 
tion, institution  or  company,  or  proprietor  of  any  bank  or  fund 
for  the  purpose  of  issuing  notes,  receiving  deposits,  making  dis- 
counts or  transacting  any  other  business  which  incorporated 
banks  may  or  do  transact  by  virtue  of  their  respective  acts  of 
incorporation ;  'and  if  any  person  unauthorized  by  law  as  afore- 
said, shall  hereafter  subscribe  or  become  a  member  or  proprietor 
as  aforesaid,  he  shall  forfeit  and  pay  for  every  such  offense  the 
sum  of  $1,000,  to  be  recovered  by  any  person  who  shall  sue  for 
the  same,  in  an  action  of  debt,  one-half  thereof  to  his  own  use, 
and  the  other  half  to  the  use  of  the  people  of  this  State ;  and  all 
notes  and  securities  for  the  payment  of  money,  or  the  delivery 
of  property,  made  or  given  to  any  such  association,  institution 
or  company,  not  authorized  as  aforesaid,  shall  be  null  and  void : 
Provided,  nevertheless,  that  nothing  herein  contained  shall  be 
held  in  any  way  to  extend  to  the  association  in  the  city  of  Al- 
bany, known  by  the  name  of  the  Mercantile  Company,  nor  the 
association  in  the  city  of  New  York,  known  by  the  name  of  the 
Merchants'  Bank,  until  the  first  Tuesday  in  May,  1805'." 
340 


PLAN   OF  THE   MERCHANTS     BANK. 

To  all  to  whom  these  presents  shall  come,  or  in  any  wise  concern. 

Be  it  known  and  made  manifest,  that  we  the  subscribers,  have 
formed  a  company  or  limited  partnership,  and  do  hereby  associate 
and  agree  with  each  other,  to  conduct  business  in  the  manner  here- 
inafter specified  and  described,  by  and  under  the  name  and  stylo 
of  the  ''MERCHANTS'  BANK,"  and  we  do  hereby  mutually  cov- 
enant, declare,  and  agree,  that  the  following  are  and  shall  be  the 
fundamental  articles  of  this  our  association  and  agreement  with 
each  other,  by  which  we,  and  all  persons  who  at  any  time  here- 
after may  transact  business  with  the  said  company,  shall  be  bound 
and  concluded. 

I.  The  capital  stock  of  the  said  company  shall  consist  of  one 
million  two  hundred  and  fifty  thousand  dollars,  in  money  of  the 
United  States.    The  said  capital  stock  shall  be  divided  into  shares 
of  fifty  dollars  each:    two  dollars  and  fifty  cents  on  each  share 
shall  be  paid  at  the  time  of  subscribing,  and  the  remainder  shall 
be  paid  at  such  times,  and  in  such  proportions  as  the  board  of 
directors  shall  order  and  appoint,  under  pain  of  forfeiting  to  the 
said  company  the  said  shares,  and  all  previous  payments  thereon : 
but  no  payment  shall  be  required,  unless  by  a  notice  to  be  pub- 
lished for  at  least  fifteen  days,  in  two  newspapers  printed  in  the 
city  of  New  York. 

II.  The  affairs  of  the  said  company,  shall  be  conducted  by  six- 
teen directors,  who  shall  elect  one  of  their  number  to  be  the  presi- 
dent thereof,  and  nine  of  the  directors  shall  form  a  board  cr 
quorum  for  transacting  all  the  business  of  the  company,  except 
ordinary  discounts,  which  it  shall  be  in  the  power  of  any  five 
of  the  directors  to  perform,  of  whom  the  president  shall  always 
be  one,  except  in  case  of  his  sickness  or  necessary  absence,  when 
his  place  may  be  supplied  by  any  other  director,  whom  he  by 
writing  under  his  hand,  shall  nominate  for  that  purpose ;  and  until 
the  second  Tuesday  in  June,  one  thousand  eight  hundred  and 
four,  Oliver  Wolcott,  Richard  Varick,  Peter  Jay  Munro,  Joshua 
Sands,  Thomas  Storm,  William  W.  Woolsey,  John  Hone,  John 
Kane,  Joshua  Jones,  Robert  Gilchrist,  Wynant  Van  Zandt,  jun., 
Isaac  Bronson,  James  Roosevelt,  John  Swartwout,  Henry  I.  Wy- 

341 


PLAN   OF  THE    MERCHANTS'    BANK 

coff,  and  Isaac  Hicks,  shall  be  directors  of  the  said  company ;  the 
directors  from  and  after  that  period,  shall  be  elected  for  one  year 
by  the  stockholders,  for  the  time  being,  and  each  director  shall 
be  a  stockholder  at  the  time  of  his  election,  and  shall  cease  to  be 
a  director  if  he  should  cease  to  be  a  stockholder :  and  the  number 
of  votes  which  each  stockholder  shall  be  entitled  to,  shall  be  equal 
to  the  number  of  shares  which  he  shall  have  held  on  the  books  of 
the  company,  for  at  least  sixty  days  prior  to  the  election ;  and  all 
stockholders  shall  vote  at  elections  by  ballot,  either  personally  or 
by  proxy ;  to  be  made  in  such  form  as  the  board  of  directors  may 
appoint. 

III.  A  general  meeting  of  the  stockholders  of  the  company 
shall  be  holden  upon  the  first  Tuesday  of  June,  in  every  year  (ex- 
cepting in  June  now  next  ensuing),  at  such  place  as  the  board 
of  directors  shall  appoint,  by  notice,  to  be  published  in  two  news- 
papers printed  in  the  city  of  New  York,  at  least  fifteen  days  pre- 
vious to  such  meeting,  for  the  purpose  of  electing  directors  for 
the  ensuing  year,  who  shall  take  their  seats  at  the  board  on  the 
second  Tuesday  in  the  same  month  of  June,  and  immediately  pro- 
ceed to  elect  the  president. 

IV.  The  board  of  directors  are  hereby  fully  empowered  to 
make,  revise,  and  alter  or  annul,  all  such  rules,  by-laws,  and  regu- 
lations, for  the  government  of  the  company,  and  that  of  their 
officers,  servants,  and  affairs  as  they,  or  a  majority  of  them,  shall 
from  time  to  time  think  expedient,  not  inconsistent  with  law,  or 
these  articles  of  association ;  and  to  use,  employ,  and  dispose  of 
the  joint  stock,  funds  or  property  of  the  said  company  (subject 
only  to  the  restrictions  hereinafter  contained)  as  to  them,  or  a 
majority  of  them,  shall  seem  expedient. 

V.  All  bills,  bonds,  notes,  and  every  contract  and  engage- 
ment on  behalf  of  the  company,  shall  be  signed  by  the  president ; 
and  countersigned  or  attested  by  the  cashier  of  the  company; 
and  the  funds  of  the  company  shall  in  no  case  be  heki  respon- 
sible for  any  contract  or  engagement  whatever,  unless  the  same 
shall  be  so  signed  and  countersigned,  or  attested  as  aforesaid. 

342 


— DRAWN    BY    ALEXANDER    HAMILTON. 

VI.  The   books,   papers,   correspondence   and    funds    of   the 
company,  shall  at  all  times  be  subject  to  the  inspection  of  the 
directors. 

VII.  The  said  board  of  directors  shall  have  power  to  ap- 
point a  cashier,  and  all  other  officers  and  servants,  for  execut- 
ing  the  business  of  the  company;   and  to   establish  the  com- 
pensations to  be  paid  to  the  president  and  all  the  other  officers 
and  servants  of  the  company  respectively;  all  which,  together 
with  all  other  necessary  expenses,  shall  be  defrayed  out  of  the 
funds  of  the  company. 

VIII.  A  majority  of  the  directors  shall  have  power  to  call 
a   general   meeting  of   the   stockholders,   for   purposes    relative 
to  the  concerns  of  the  company;   giving  at  least  thirty   days' 
notice,  in  two  of  the  public  newspapers,  printed  in  the  city  of 
New  York,  and  specifying  in  such  notice  the  object  or  objects 
of  such  meeting. 

IX.  The  shares  of  capital  stock,  at  any  time  owned  by  any 
individual   stockholder,   shall   be   transferable   on   the   books  of 
the  company,  according  to  such  rules  as,  conformable  to  law, 
may  be  established  in  that  behalf  by  the  board  of  directors; 
but  all  debts  actually  due  and  payable  to  the  company,  by  a 
stockholder  requesting  a  transfer,  must  be  satisfied  before  such 
transfer  shall  be  made,  unless  the  board  of  directors  shall  direct 
to  the  contrary. 

X.  No  transfer  of  stock  in  this  company  shall  be  considered 
as  binding  upon  the  company,  unless  made  in  a  book  or  books, 
to  be  kept  for  that  purpose  by  the  company.     And  it  is  hereby 
further   expressly   agreed   and   declared,    that   any   stockholder, 
who  shall  transfer  in  manner  aforesaid  all  his  stock  or  shares 
in  this  company,  to  any  other  person  or  persons  whatever,  shall 
ipso  facto  cease  to  be  a  member  of  this  company;  and  that  any 
person  or  persons  whatever,  who  shall  accept  a  transfer  of  .any 
stock  or  share  in  this  company,  shall  ipso  facto  become  and  be 
a  member  of  this  company,  according  to  these  articles  of  as- 
sociation. 

343 


PLAN   OF   THE   MERCHANTS     BANK — 

XL  It  is  hereby  expressly  and  explicitly  declared  to  be  the 
object  and  the  intention  of  the  persons  who  associate  under 
the  style  or  firm  of  the  ''MERCHANTS'  BANK,"  that  the  joint 
stock  or  property  of  the  said  company  (exclusive  of  dividends 
to  be  made  in  the  manner  hereinafter  mentioned)  shall  alone 
be  responsible  for  the  debts  and  engagements  of  the  said  com- 
pany. And  that  no  person,  who  shall  or  may  deal  with  this 
company,  or  to  whom  they  shall  or  may  become  in  any  wise 
indebted,  shall  on  any  pretense  whatever  have  recourse  against 
the  separate  property  of  any  present  or  future  member  of  this 
company,  or  against  their  persons,  further  than  may  be  neces- 
sary to  secure  the  faithful  application  of  the  funds  thereof,  to 
the  purpose  to  which  by  these  presents  they  are  liable.  But 
all  persons  accepting  any  bond,  bill,  note,  or  other  contract  of 
this  company,  signed  by  the  president,  and  countersigned  or 
attested  by  the  cashier  of  the  company  for  the  time  being,  or 
dealing  with  it  in  any  other  manner  whatsoever,  thereby  respec- 
tively give  credit  to  the  said  joint-stock  or  property  of  the  said 
company,  and  thereby  respectively  disavow  having  recourse, 
or  any  pretense  whatever,  to  the  person  or  separate  property  of 
any  present  or  future  member  of  this  company,  except  as  above 
mentioned.  And  all  suits  to  be  brought  against  this  company 
(if  any  shall  be)  shall  be  brought  against  the  president  for 
the  time  being;  and  in  case  of  his  death  or  removal  from  office, 
pending  any  suit  against  him,  measures  shall  be  taken  at  the 
expense  of  the  company  for  substituting  his  successor  in  office 
as  a  defendant;  so  that  persons  having  demands  upon  the  com- 
pany, may  not  be  prejudiced  or  delayed  by  that  event,  or  if 
the  person  suing  shall  go  on  against  the  person  first  named 
as  defendant  (notwithstanding  his  death  or  removal  from  of- 
fice), this  company  shall  take  no  advantage  by  writ  of  error, 
or  otherwise,  of  such  proceeding,  on  that  account ;  and  all  re- 
coveries had  in  manner  aforesaid,  shall  be  conclusive  upon  the 
company,  so  far  as  to  render  the  company's  said  joint  stock  or 
property  liable  thereby,  and  no  further;  and  the  company  shall 
immediately  pay  the  amount  of  such  recovery  out  of  their  joint 
stock,  but  not  otherwise.  And  in  case  of  any  suit  at  law,  the 
president  shall  sign  his  appearance  upon  the  writ,  or  file  com- 
344 


— DRAWN    BY    ALEXANDER    HAMILTON. 

mon  bail  thereto;  it  being  expressly  understood  and  declared, 
that  all  persons  dealing  with  the  said  company  agree  to  these 
terms,  and  are  to  be  bound  thereby. 

XII.  Dividends  of  the  profits  of  the  company,  or  of  so  much 
of  the  said  profits  as   shall  be  deemed  expedient  and  proper, 
shall  be  declared  and  paid  half  yearly  during    the    months    of 
May  and  November  in  every  year,  and  shall  from  time  to  time 
be  determined  by  a  majority  of  the  said  directors,  at  a  meeting 
to  be  held  for  that  purpose,  and  shall  in  no  case  exceed  the 
amount  of  the  net  profits  actually  acquired  by  the  company;  so 
that  the  capital  stock  of  the  company  shall  never  be  impaired 
by  the   dividends :  and  at  the  expiration  of  three  years,  from 
the  first  Tuesday  of  June  next,  a  dividend  of  surplus  profits 
shall  be  made,  but  the  directors  shall  be  at  liberty  to  retain  at 
least  one  per  cent,  upon  the  capital,  as  a  fund  for  future  con- 
tingencies. 

XIII.  If  the  said  directors  shall  at  any  time,  wilfully  and 
knowingly,   make  or   declare  any  dividend   which   shall   impair 
the  said  capital  stock,  all  the  directors  present  at  the  making  or 
declaring  such  dividend,  and  consenting  thereto,  shall  be  liable, 
in  their  individual  capacities,  to  the  company,  for  the  amount 
or  proportion  of  the  said  capital  stock  so  divided  by  the  said 
directors.     And  each  director  who  shall  be  present  at  the  mak- 
ing or   declaring  of   such   dividend,   shall   be   deemed   to   have 
consented  thereto,  unless  he  shall  immediately  enter,  in  writing, 
his  dissent  on  the  minutes  of  the  proceedings  of  the  board,  and 
give  public  notice  to  the  stockholders,  that  such  dividend  has 
been  declared. 

XIV.  The   articles   of   agreement   shall    be   published    in   at 
least  three  newspapers,  printed  in  the  city  of  New  York,  for  one 
month ;  and  for  the  further  information  of  all  persons,  who  may 
transact  business  with,  or  in   any  manner  give  credit  to  this 
company,  every  bond,  bill,  note,  or   other  instrument  or  con- 
tract,  by  the  effect  or  terms   of  which  the  company   may  be 
charged  or  held  liable  for  the  payment  of  money,  shall  specially 

345 


PLAN   OF   THE   MERCHANTS'    BANK — 

declare  in  such  form  as  the  board  of  directors  shall  prescribe, 
that  payment  shall  be  made  out  of  the  joint  funds  of  the  Mer- 
chants' Bank,  according  to  the  present  articles  of  association, 
and  not  otherwise;  and  a  copy  of  the  eleventh  article  of  this 
association  shall  be  inserted  in  the  bank  book  of  every  person 
depositing  money,  or  other  valuable  property,  with  the  company 
for  safe  custody,  or  a  printed  copy  shall  be  delivered  to  every 
such  person,  before  any  such  deposit  shall  be  received  from  him. 
And  it  is  hereby  expressly  declared,  that  no  engagement  can 
be  legally  made  in  the  name  of  the  said  company,  unless  it  con- 
tains a  limitation  or  restriction,  to  the  effect  above  recited.  And 
the  company  hereby  expressly  disavow  all  responsibility,  for 
any  debt  or  engagement,  which  may  be  made  in  their  name, 
not  containing  a  limitation  or  restriction  to  the  effect  aforesaid. 

XV.  The  company  shall  in  no  case  be  owners  of  any  ships 
or  vessels,  or  directly  or  indirectly  concerned  in  trade,  or  the 
importation  or  exportation,  purchase  or  sale  of  any  goods,  wares, 
or   merchandise   whatever    (bullion   only   excepted),    unless   by 
selling  such  goods,  wares  and  merchandise,  as  shall  be  truly 
pledged  to  them,  by  way  of  security  for  debts  due  to  the  said 
company. 

XVI.  If   a  vacancy   shall   at   any   time   happen   among  the 
directors,   by   death,   resignation,   or   otherwise,   the   residue   of 
the  directors,  for  the  time  being,  shall  immediately  elect  a  direc- 
tor, to  fill  the  said  vacancy,  until  the  next  election  of  directors, 
to  be  made  according  to  the  second  article  of  these  presents. 

XVII.  This  association  shall  continue  until  the  first  Tues- 
day of  June,  one  thousand  eight  hundred  and  fifteen,  and  no 
longer ;  but  the  proprietors  of  two  thirds  of  the  capital  stock 
of  the  company  may,  by  their  concurring  votes,   at   a  general 
meeting  to  be  called  for  that  express  purpose,  dissolve  the  same 
at  any  prior  period;  provided  that  notice  of  such   a  meeting, 
and  of  its  objects,  shall  be  published  in  at  least  three   news- 
papers, to  be  printed  in  the  city  of  New  York,  for  at  least  six 
months  previous  to  the  time  appointed  for  such  meeting. 

346 


— DRAWN    BY    ALEXANDER    HAMILTON. 

XVIII.  Immediately  on  any  dissolution  of  this  association, 
effectual  measure  shall  be  taken  by  the  directors  then  existing 
for  closing  all  the  concerns  of  the  company,  and  for  dividing 
the  capital  and  profits,  which  may  remain,  among  the  stock- 
holders, in  proportion  to  their  respective  interests. 

In  witness  thereof,  we  have  hereunto  set  our  names  or  firms 
the  seventh  day  of  April,  one  thousand  eight  hundred  and  three. 


347 


FORM    OF    INDENTURE    SECURING    THE    PAYMENT    ov    NOTES 
OR  DEBENTURE  BONDS  OF  A  BUSINESS  TRUST. 

INDENTURE,  dated  as  of  the  day  of 

,19       ,  made  by  and  between 

as  Trustees  under  a  certain  agreement  and  declaration  of  trust, 
dated  ,  creating  a  trust  fund  called 

Company,  for  themselves  as  such  Trustees  and  other  stock- 
holders in  the  said  trust  hereinafter  called  the  Promissors,  par- 
ties of  the  first  part,  and  Trust  Company,  a 
corporation  of  the  State  of  ,  hereinafter  called 
the  Trustee,  party  of  the  second  part: 

WHEREAS,  among  the  provisions  of  said  agreement  and 
declaration  of  trust  are  the  following:  (The  term  "Trustee" 
therein  referring  to  the  Promisors,  parties  of  the  first  part,  to 
this  Indenture),  to-wit: — 

Here  insert  particular  or  general  provision  in  the 
declaration  of  trust  authorizing  the  creation  of  the 
note  or  bond  issue. 

AND,  WHEREAS,  this  indenture  is  substantially  in  the  form 
authorized;  and 

WHEREAS,  the  notes  to  be  issued  unto  and  to  be  secured 
by  this  indenture,  the  coupons  for  interest  annexed  thereto,  and 
the  certificate  to  be  indorsed  thereon  are  to  be  in  substantially 
the  following  form: 

(Form  of  Note.) 
No $ 

United  States  of  America. 

Company,  years, 

per  cent.    Secured  gold  note.    Due , 

19 

348 


INDENTURE  SECURING  BOND  ISSUE. 

The  undersigned,  not  individually,  but  as  trustees  under  an 
agreement  and  declaration  of  trust,  dated  ,  19  , 

creating  a  trust  called  the  Company, 

for  value  received,  hereby  promise  to  pay  to  the  bearer,  or  if 
registered,  to  the  registered  holder  hereof, 
dollars  on  the  first  day  of  ,  19       ,  and  to 

pay  interest  on  said  principal  sum  at  the  rate  of  per  cent 

per  annum  from  the  day  of  ,  19       ,  payable 

on  the  days  of  of  each 

year,  but  only  upon  presentation  and  surrender,  as  they  shall 
severally  mature,  of  the  coupons  annexed  hereto.  All  such  pay- 
ments of  both  principal  and  interest  shall  be  made  at  the  office 
of  Trust  Company  in  the  City  of 

and  State  of  ,  in  gold  coin  of  the  United  States 

of  America,  of  or  equal  to  the  standard  of  weight  and  fineness 
of  the  year  19  ,  and  without  deduction  for  any  tax  or  taxes 
which  the  undersigned  Trustees  or  a  trustee  in  the  trust  in- 
denture hereinafter  mentioned  may  be  required  to  pay  there- 
on, or  to  retain  therefrom,  under  any  present  or  future  law  or 
ordinance  of  the  United  States  or  of  any  State,  Territory,  County 
or  Municipality,  or  any  other  lawful  taxing  authority  therein. 

This  note  is  one  of  a  series  of  notes  known  as  years, 

per  cent,  secured  gold  notes  of  the 
Company  for  an  aggregate  principal  sum  not  exceeding 
dollars  at  any  one  time  outstanding,   issued  and  to  be  issued 
under  and  in  pursuance  of  and  all  equally  secured  by,  a  trust  in- 
denture dated  ,  19         ,  between  the  undersigned 
Trustees  and  the  Trust  Company,  as  trustee, 
to  which  indenture  reference  is  hereby  made  for  a  specification 
of  the  property  therein  assigned  and  pledged  and  agreed  to  be 
assigned  and  pledged,  as  security  for  the  payment  of  the  notes 
of  this  series,  and  the  nature  and  extent  of  such  security. 

The  entire  series  of  notes  at  any  time  outstanding,  but  not  a 
part  thereof,  may  be  redeemed  at  the  option  of  the  Trustees, 
on  notice  published  at  least  once  a  week  for  successive 

weeks  immediately  preceding  the  date  of  redemption  specified 

$49 


EXHIBITS. 

in  such  notice  in  a  newspaper  published  in  the  City  of  , 

upon  payment,  if  such  redemption  be  made  on  or  before 
19         ,  of  the  principal  of  said  notes  and  the  premium  of 
per  cent  thereon  and  accrued  interest,  and  upon  payment,  if  such 
redemption  be  made  after  said  ,  19         ,  and  be- 

fore the  maturity  hereof  of  said  principal,  and  a  premium  of  1 
per  cent  thereon  and  accrued  interest. 

If  an  event  of  default,  as  defined  in  the  above  mentioned 
trust  indenture,  shall  occur,  the  principal  of  all  said  notes  shall 
become  or  declared  due  and  payable  in  the  manner  and  with 
the  effect  provided  in  said  trust  indenture. 

This  note  is  secured  by  the  undersigned  Trustees,  not  in- 
dividually, but  as  trustees  in  the  aforesaid  agreement  and  declar- 
ation of  trust,  dated  ,19  ,  to  which 
reference  is  hereby  made ;  and  all  personal  liability  in  any  present 
or  future  Trustee  is  expressly  and  strictly  limited  to  the  ap- 
plication and  distribution  of  the  property  from  time  to  time 
constituting  the  trust  estate,  in  accordance  with  the  provision  of 
said  agreement  and  declaration  of  trust  and  the  trust  indenture 
above  referred  to;  and  any  and  all  liability  of  any  present  or 
future  Trustees  (except  as  aforesaid),  or  member  of  the  Execu- 
tive Committee  in  said  agreement  and  declaration  of  trust 
named  or  provided  for,  or  shareholder  or  other  beneficiary  there- 
under, is,  by  the  acceptance  and  as  a  consideration  for  the  is- 
sue and  execution  hereof,  expressly  waived  by  the  holders 
hereof. 

The  principal  and  interest  in  respect  of  this  note  shall  be 
payable  without  regard  to  any  equities  between  the  Trustees  and 
the  original  or  any  intermediate  holders  hereof;  the  bearer,  or 
if  registered,  the  registered  holder  hereof,  may  sue  hereon  in 
his  own  name,  and  this  note  shall  have  all  other  attributes  of  a 
negotiable  instrument.  Every  holder  hereof,  by  accepting  this 
note,  assents  to  the  foregoing  provisions. 

This  note   shall  pass  by  delivery    unless    registered  in    the 
owner's  name,  on  the  books  of  the  undersigned  Trustees,  at  the 
350 


INDENTURE    SECURING    BOND    ISSUE. 

office  or  agency  in  the  City  of  ,  State  of  , 

and  such  registration  is  noted  hereon.  After  such  registration, 
no  transfers  shall  be  valid  unless  made  on  such  books  by  the 
registered  owner  in  person,  or  by  his  attorney  thereunto  duly 
authorized  and  similarly  noted  hereon;  but  this  note  may  be 
discharged  from  registration  by  being  transferred  to  bearer,  and 
thereupon  transferability  by  delivery  shall  be  restored ;  from  time 
to  time  this  note  may  again  be  registered  or  transferred  to 
bearer  as  before.  No  such  registration,  however,  shall  affect 
the  negotiability  of  the  coupons  which  shall  continue  to  be  trans- 
ferable by  delivery  merely  and  shall  remain  payable  to  bearer. 
This  note  shall  not  become  obligatory  for  any  purpose  unless 
and  until  it  shall  have  been  authenticated  by  the  certificate  in- 
dorsed hereon  of  the  Trustees  in  said  trust  indenture. 

IN  WITNESS  WHEREOF,  at  the  City  of 
in  the  State  of  ,  the  undersigned  Trustees  have 

caused  their  names  to  be  hereunto  affixed  by  one  of  their  agents 
duly  authorized,  under  the  designation  of  Assistant  Treasurer, 
on  the  day  of  ,  19 


As  Trustees  under  the  agreement  and  declaration  of  trust, 
dated  ,19        ,  creating  the  trust  called  the 

Company,  and  not  individually. 

By... 

Assistant  Treasurer. 
(Form  of  Interest  Coupon.) 

No $ 

On  the  day  of  ,  19        ,  upon  the 

presentation  and  surrender  hereof,  at  the  office  of 
Trust  Company,  in  the  City  of  ,  the  bearer  will 

be  entitled  to  receive  dollars,  United  States  gold 

coin,  without  deductions  for  taxes,  being  months'  in- 

terest then  due  on  the  year  per  cent  secured 

gold  note  of  the  Company,  No.  ,  unless 

such  note  shall  have  been  called  for  prior  redemption. 

,   Assistant  Treasurer. 

351 


EXHIBITS. 

(Form   of  Trustee's   Certificate.) 

This   is  one  of  the  notes  described  in  the  within  mentioned 
trust  indenture. 

Trust  Company,  Trustee. 

By  

AND,   WHEREAS,   all   acts   and   things    prescribed   by   the 
aforesaid  agreement  and  declaration  of  trust  dated  , 

to  make  said  year  per  cent  secured  gold  notes, 

when  secured  by  the  promisors  and  authenticated  by  the  Trus- 
tees, valid,  legal  and  binding  obligations,  and  to  make  this 
indenture  a  valid,  legal  and  binding  agreement  for  the  security 
thereof,  have  been  duly  performed  and  complied  with: 

NOW,     THEREFORE,     THIS     INDENTURE     W I T- 
NESSETH : 


That  in  consideration  of  the  premises  and  of  the  purchase 
and  acceptance  of  such  notes  by  the  holders  thereof,  and  of 
the  sum  of  $1.00  to  the  Promisors  by  the  Trustees  at  or  before 
the  ensealing  and  delivery  of  these  presents,  receipt  whereof 
is  hereby  acknowledged,  and  in  order  to  secure  the  payment 
of  the  principal  and  interest  of  all  such  notes  at  any  time 
issued  and  outstanding  in  this  indenture,  according  to  their 
tenor  and  effect,  and  the  performance  of  all  covenants  herein 
contained,  and  to  declare  the  terms  and  conditions  upon  which 
such  notes  shall  be  issued,  received,  and  held,  the  Promisors 
have  executed  and  delivered  these  presents,  and  have  sold, 
pledged,  assigned,  transferred  and  set  over,  unto  the  Trustee, 
party  of  the  second  part,  its  successors  and  assigns  forever, 
the  following  property,  that  is: 

Here  insert  description  of  property  pledged  to  secure  notes. 

TO  HAVE  AND  TO  HOLD  the  properties  hereby  assigned 
and  pledged,  or  intended  to  be  assigned  and  pledged,  or  here- 
352 


INDENTURE    SECURING    BOND    ISSUE. 

after  to  be  assigned  and  pledged,  unto  the  Trustee,  its  suc- 
cessor or  successors  and  assigns,  forever: 

BUT  IN  TRUST,  NEVERTHELESS,  for  the  equal  and 
proportionate  benefit  and  security  of  each  and  every  present 
and  future  holder  of  any  of  the  notes,  or  the  coupons  thereto 
appertaining,  issued  under  and  secured  by  this  indenture,  and 
for  the  enforcement  of  the  payment  of  said  notes  and  coupons, 
when  due,  according  to  their  tenor,  purport  and  effect,  and  the 
performance  of,  and  the  compliance  with,  the  covenants  and 
conditions  of  said  notes  and  of  this  indenture,  without  prefer- 
ence, priority  or  distinction,  as  to  lien,  or  otherwise,  of  any 
of  said  notes  over  any  of  the  others  of  said  notes  issued  here- 
under,  by  reason  of  priority  in  the  time  of  issue  or  negotiation 
thereof,  or  otherwise  howsoever,  so  that  each  and  every  note 
issued  or  to  be  issued  hereunder  shall  have  the  same  right, 
lien  and  priority  under  and  by  virtue  of  this  indenture  as  if 
all  of  said  notes  had  been  duly  issued  and  negotiated  simultan- 
eously with  the  execution  and  delivery  of  this  indenture. 

AND  IT  IS  HEREBY  EXPRESSLY  COVENANTED, 
that  any  and  all  personal  liability  of  the  Promisors  in  connec- 
tion with  this  indenture  or  the  notes  issued  hereunder  shall 
be  expressly  and  strictly  limited  to  the  application  and  dis- 
tribution, in  accordance  with  the  provisions  of  the  agreement 
and  declaration  of  trust,  dated  ,19  ,  and 

hereof,  of  the  property  from  time  to  time  constituting  the 
trust  estate;  that  any  and  all  liability  of  the  Promisors  (ex- 
cept as  aforesaid),  or  member  of  the  Executive  Committee  in 
said  agreement  and  declaration  named  or  provided  for,  or 
shareholder  or  other  beneficiary  thereunder,  is  expressly  waived 
by  the  takers  and  holder^  of  said  notes,  who,  by  such  taking, 
agree  that  the  same  shall  be  payable  only  out  of  the  property 
from  time  to  time  constituting  the  trust  estate;  and  that  all 
such  notes,  and  the  coupons  for  interest  thereon,  are  to  be 
issued,  authenticated,  delivered,  received  and  negotiated,  and 
that  the  securities  pledged  hereunder  are  to  be  held  by  the 

353 


EXHIBITS. 


Trustee,  subject  to  the  following  further  trusts,  covenants,  con- 
ditions and  provisions,  viz : 

ARTICLE    FIRST. 

Section  1.  The  amount  of  notes  to  be  issued  hereunder 
which  may  be  executed  by  the  Promisors,  and  which  may  be 
authenticated  by  the  Trustee,  shall  never  exceed  the  aggregate 
principal  sum  of  $ at  any  one  time  outstanding. 

The  notes  to  be  issued  hereunder  shall  from  time  to  time  be 
signed  by  the  Promisors,  as  Trustees  under  said  agreement  and 
declaration  of  trust,  dated  ,  19  ,  and  not 

individually,  or  such  notes  bearing  the  name  of  each  of  the 
Promisors,  as  such  Trustees,  shall  be  signed  by  one  of  their 
agents  duly  appointed  as  hereinafter  provided  in  section  1  of 
Article  Sixth  hereof,  and  such  notes  shall  then  be  delivered 
for  authentication  to  the  Trustee;  and  thereupon,  the  said  notes 
shall  be  authenticated  and  delivered  as  is  provided  in  sections 
3  and  4  of  this  Article  First  and  not  otherwise. 

In  case  any  of  the  trustees  in  whose  names  any  of  the  said 
notes  shall  have  been  signed  shall  cease  to  be  trustees  or  trus- 
tee   under   said   agreement    and     declaration    of    trust     dated 
,  19         ,   and   thereby  shall  cease  to  be 

Promisors  or  Promisor  hereunder,  or  in  case  any  agent  who, 
on  behalf  of  the  Promisors,  shall  have  signed  any  of  said  notes 
shall  cease  to  be  such  agent,  before  the  notes  so  signed  shall 
have  been  actually  executed,  and  authenticated  and  delivered  by 
the  Trustee,  such  notes  may  nevertheless  be  executed,  and  when 
so  executed  may  be  issued,  authenticated  and  delivered  as  though 
the  said  three  persons  in  whose  names  such  notes  had  been 
signed,  or  the  agent  who  had  signed  such  notes  on  behalf  of 
the  Promisors,  had  not  ceased  to  be  such  trustees  and  Promisors, 
or  Trustee  and  Promisor,  or  such  agent,  as  the  case  may  be. 
And  any  note  may  be  signed  on  behalf  of  the  Promisors  by 
the  person  who  shall  be  their  agent  at  the  actual  time  of  such 
signature,  although  at  the  time  of  the  date  of  the  note  such 
person  shall  not  have  been  the  agent  of  the  Promisors. 
354 


INDENTURE    SECURING    BOND    ISSUE. 

The  coupons  for  interest  on  said  notes  shall  be  authenticated 
by  the  fac-simile  signature  of  any  present  or  future  agent  of 
the  Promisors,  and  for  that  purpose  the  Promisors  may  adopt 
and  use  the  fac-simile  signature  of  any  present  or  future  agent, 
notwithstanding  the  fact  that  he  may  have  ceased  to  be  such 
agent  at  the  time  when  such  notes  shall  be  actually  issued, 
authenticated  and  delivered. 

Section  2.  Only  such  of  said  notes  as  shall  bear  thereon  a 
certificate  substantially  in  the  form  hereinbefore  recited,  duly 
signed  by  the  Trustee,  shall  be  secured  by  this  indenture,  or 
shall  be  entitled  to  any  lien  or  benefit  hereunder.  No  such  note 
or  any  coupon  thereunto  appertaining  shall  be  valid  for  any  pur- 
pose unless  and  until  such  certificate  shall  have  been  duly  in- 
dorsed on  such  note.  Such  certificate  of  the  Trustee  upon  any 
notes  signed  by  or  on  behalf  of  the  Promisors  shall  be  con- 
clusive and  the  only  evidence  that  the  note  so  authenticated 
was  duly  issued  hereunder,  and  is  entitled  to  the  benefit  of  the 
trust  and  security  hereof. 

Section  3.  The  Promisors  shall  keep  at  an  office  in  the  City 
of  and  State  of  , 

proper  books  wherein  they  will,  upon  presentation  of  any  of 
the  notes  for  such  purpose  and  under  such  reasonable  regula- 
tions as  they  may  prescribe,  register,  or  transfer  said  notes. 
Such  registration  shall  be  noted  on  the  note,  after  which  no 
transfer  shall  be  valid  unless  made  by  the  registered  holder 
in  person  or  by  his  attorney  duly  authorized,  and  similarly 
noted  on  the  note,  but  any  note  may  be  discharged  from  regis- 
tration by  being  in  like  manner  re-transferred  to  bearer,  after 
which  it  shall  be  transferable  by  delivery;  and  such  notes  may 
again  and  from  time  to  time  be  registered  or  transferred  to 
bearer  as  before.  No  such  registration  shall  affect  the  negoti- 
ability of  the  coupons  appertaining  to  any  note,  but  the  coupons 
shall  continue  to  be  transferable  by  delivery  and  shall  remain 
payable  to  bearer. 

For  any  transfer  or  registration  under  the  provisions  of  this 
Section  3,  the  Promisors  may  require  the  payment  of  a  sum 

355 


EXHIBITS. 

sufficient  to  reimburse  them  for  any  stamp  tax  or  other  govern- 
mental charges. 

The  person  in  whose  name  any  note  shall  be  registered  shall 
for  all  purposes  of  this  indenture  be  deemed  and  regarded  as 
the  owner  thereof,  and  thereafter  payment  of  the  principal  of 
such  registered  notes  shall  be  made  only  to  or  upon  the  order 
of  such  registered  holder  thereof.  All  such  payments  shall  be 
valid  and  effectual  to  satisfy  and  discharge  liability  upon  such 
notes  to  the  extent  of  the  sum  or  sums  so  paid.  The  Promisors 
and  the  Trustee  may  deem  and  treat  the  bearer  of  any  note 
which  shall  not  at  any  time  be  registered  and  the  bearer  of  any 
coupon  for  interest  upon  any  note,  whether  such  note  shall  be 
registered  or  not,  as  the  absolute  owner  of  such  note  or  coupon 
for  the  purpose  of  receiving  payment  thereof  and  for  all  other 
purposes  whatsoever,  and  the  Promisors  and  the  Trustee  shall 
not  be  affected  by  any  notice  to  the  contrary. 

Section  4.  Until  the  definitive  notes  can  be  prepared  the 
Promisors  may  sign  and  the  Trustee  shall  authenticate  and  de- 
liver, in  lieu  of  such  definitive  notes  and  subject  to  the  same  pro- 
visions, limitations  and  conditions,  temporary  typewritten, 
printed  or  lithographed  notes,  substantially  of  the  tenor  of  the 
definitive  notes,  except  that  no  coupons  shall  be  attached  to  any 
of  such  temporary  notes  and  that  each  of  such  temporary  notes 
may  be  for  one  thousand  dollars  of  principal  or  any  multiple 
thereof.  Each  such  temporary  note  shall  bear  upon  its  face 
the  words  "Temporary  Year  Per  cent. 

Secured  Gold  Note,"  and  shall  be  authenticated  by  the  Trustee 
in  like  manner  as  hereinabove  provided  for  the  definitive  notes; 
and  the  authentication  by  the  Trustee  shall  be  the  only  and 
conclusive  evidence  that  the  note  so  authenticated  has  been  duly 
issued  hereunder  and  that  the  holder  is  entitled  to  the  benefit 
of  this  indenture. 

Such  temporary  notes  shall  be  exchangeable,  without  charge 
or  expense  to  the  holder,  for  a  like  aggregate  face  amount  of 
temporary  notes  of  such  different  denominations,  as  the  Promis- 
356 


INDENTURE    SECURING    BOND    ISSUE. 

ors  may  issue,  or  for  a  like  aggregate  face  amount  of  definitive 
notes  when  the  same  are  ready  for  delivery,  and  upon  the  sur- 
render of  any  such  temporary  notes  for  exchange  such  tem- 
porary notes  shall  forthwith  be  canceled  by  the  Trustee  and 
delivered  to  the  Promisors  on  their  written  demand,  and  the 
Promisors  thereupon,  but  only  after  such  surrender  and  can- 
cellation, at  their  own  expense  shall  issue  and  the  Trustee  shall 
authenticate  and  deliver  in  exchange  therefor,  temporary  or 
definitive  notes  for  the  same  aggregate  face  amount  as  the  tem- 
porary notes  surrendered.  Until  so  exchanged,  each  of  said 
temporary  notes  in  all  respects  shall  be  entitled  to  the  lien 
and  security  in  this  indenture  as  if  it  were  a  definitive  note 
issued  and  authenticated  hereunder;  and  interest  thereon  when 
and  as  payable  shall  be  paid  and  such  payment  indorsed  thereon. 

Section  5.  In  case  any  note  issued  hereunder  shall  become 
mutilated  or  be  destroyed  or  lost,  the  Promisors,  in  their  dis- 
cretion, and  on  such  terms  as  they  may  prescribe,  may  execute 
and  thereupon  the  Trustee  shall  authenticate  and  deliver  in 
substitution  therefor  a  new  note  of  like  tenor  and  amount  and 
bearing  the  same  serial  number  as  the  note  so  mutilated,  de- 
stroyed or  lost.  In  case  of  mutilation  the  applicant  for  such 
new  note  and  coupons  shall  surrender  the  mutilated  note  and 
the  coupons  appertaining  thereto  for  cancellation.  In  case  of 
destruction  or  loss  the  applicant  for  new  note  and  coupons 
shall  furnish  to  the  Promisors  and  also  to  the  Trustee  evidence 
satisfactory  to  them  of  the  destruction  or  loss  of  such  note  and 
coupons,  and  also  such  security  or  indemnity  as  may  be  required 
by  the  Promisors  and  the  Trustee. 

ARTICLE    SECOND. 

The  Promisors,  as  trustees  under  the  aforesaid  agreement  and 
declaration  of  trust,  dated  ,  19  ,  and  not 

individually,  covenant  and  agree,  so  long  as  any  of  the  notes 
issued  under  this  indenture,  or  the  interest  to  accrue  thereon, 
shall  be  outstanding  or  unpaid,  that 

Section  1.     They  will  duly  and  punctually  pay  the  principal 

357 


EXHIBITS. 

of  and  interest  on  every  note  issued  hereunder,  according  to  the 

terms  thereof.    The  principal  amount,  and  the  premium  thereon, 

if  any,  of  each  such  note  shall  be  payable  only  upon  presentation 

and  surrender  thereof  at  the  office  of 

Trust  Company,  in  the  City  of  .     The 

interest  shall  be  payable  at  the  office  of 

Trust  Company,  but  only  upon  presentation  and  surrender  of  the 

coupons  therefor  as  they  severally  mature,  and  when  and  as  paid 

all  such  coupons  shall  forthwith  be  cancelled  by  the  Trustee. 

In  order  to  prevent  any  accumulation  of  coupons  appertaining 
to  the  secured  notes  after  maturity,  the  Promisors  will  not, 
directly  or  indirectly,  extend  or  assent  to  the  extension  of  the 
time  for  payment  of  any  said  coupons ;  and  the  Promisors  will 
not,  directly  or  indirectly,  be  parties  to  or  approve  any  such  ar- 
rangement by  purchasing  or  funding  said  coupons  or  in  any 
other  manner. 

Section  2.  Whenever  demanded  by  the  Trustee,  they  will  do, 
execute,  acknowledge  and  deliver,  or  will  cause  to  be  done,  exe- 
cuted, acknowledged  and  delivered,  all  such  further  acts,  deeds, 
transfers  and  assurances  as  the  Trustee  may  reasonably  require 
for  the  better  assuring  and  confirming  unto  the  Trustee  all  and 
singular  the  securities  pledged  hereunder  or  intended  so  to  be 
or  for  better  accomplishing  the  provisions  and  purposes  of  this 
indenture  or  effectuating  the  intention  hereof  or  for  securing 
the  payment  of  the  principal  and  interest  of  the  notes  issued 
hereunder. 

ARTICLE    THIRD. 

The  entire  series  of  the  notes  issued  hereunder  and  at  any 
time  outstanding,  but  not  a  part  thereof,  may  be  redeemed  at  the 
option  of  the  Promisors  on  any  interest  payment  date  upon 
notice  published  at  least  once  a  week  for  succes- 

sive weeks  immediately  preceding  the  date  of  redemption  speci- 
fied in  such  notice,  in  a  newspaper  of  general  circulation  pub- 
lished in  the  of  '.    If  such  date 
338 


INDENTURE    SECURING    BOND    ISSUE. 

of  redemption  shall  be  on  or  before  19  , 

the  Promisors  shall  pay,  as  hereinafter  provided,  the  principal 
of  such  notes,  a  premium  of  per  cent  thereon  and  ac- 

crued interest,  and  if  such  date  shall  be  after  said  , 

19  ,  and  prior  to  the  maturity  of  said  notes,  the  Promisors 
shall  pay,  as  hereinafter  provided,  the  principal  of  such  notes, 
a  premium  of  per  cent  thereon  and  accrued  interest. 

On  or  prior  to  the  date  fixed  for  such  redemption  the  Promisors 
shall  deposit  with  the  Trustee  a  sum  of  money  equal  to  the  face 
amount  of  said  notes,  together  with  the  premium  thereon  and  in- 
terest accrued  thereon  to  said  date  of  redemption  so  fixed.  In 
case  notice  of  redemption  shall  have  been  published  as  aforesaid, 
and  said  sum  of  money  shall  be  so  deposited  with  the  Trustee, 
interest  on  said  notes  shall  cease  from  and  after  said  date  of 
redemption.  On  and  after  said  date  the  holders  of  said  notes 
may  present  the  same  at  the  office  of  the  Trustee  and  receive 
payment  therefor  out  of  the  funds  so  deposited  by  the  Promisors 
at  the  rate  above  provided.  Said  notes  so  redeemed  shall  not 
be  re-issued,  but  shall  be  canceled  by  the  Trustee  upon  payment 
thereof  and  delivered  when  so  canceled  to  the  Promisors  upon 
their  request.  In  case  the  Promisors  shall  not,  on  or  prior  to 
the  date  fixed  for  such  redemption,  deposit  with  the  Trustee  the 
sum  of  money  sufficient  to  enable  the  Trustee  to  pay  all  such 
notes  in  the  manner  above  stated,  interest  shall  continue  to  run 
on  said  notes,  and  said  notes,  together  with  the  interest  accrued 
thereon,  shall  thereupon  at  the  election  of  the  respective  holders 
thereof,  be  due  and  payable. 

ARTICLE   FOURTH. 

Section  1.    If  one  or  more  of  the  following  events,  hereinafter 
termed  the  events  of  default,  shall  happen,  that  is  to  say, 

(a)  Default  shall  be  made  by  the  Promisors  in  the  punctual 
payment  of  any  part  of  the  principal  of  the  notes  issued  here- 
uader,  as  and  when  the  same  shall  become  due  and  payable,  or 

(b)  Default  shall  be  made  by  the  Promisors  in  the  punctual 
payment  of  any  part  of  any  instalment  of  the  interest  on  said 

359 


EXHIBITS. 

notes,  as  and  when  the  same  shall  become  due  and  payable,  and 
such  default  shall  continue  for  a  period  of  thirty  days,  or 

(c)  Default  shall  be  made  in  the  performance  of  any  of  the 
covenants,  promises  or  agreements,  on  the  part  of  the  Promisors 
herein  contained  or  referred  to,  to  be  by  them  kept  or  performed, 
and  any  such  last-mentioned  default  shall  continue  for  a  period 
of  thirty  days  after  demand  in  writing  by  the  Trustee  for  such 
performance ; 

Then  and  in  every  such  case  the  Trustee  may,  and  if  thereunto 
requested  in  writing  by  the  holders  of  a  majority  in  interest  of 
said  notes  then  outstanding,  shall 

(a)  If  the  principal  of  said  notes  be  not  already  due  and 
payable  by  the  terms  thereof,  by  written  notice  to  the  Promisors 
declare  such  principal,  to  be,  and  the  same  shall  forthwith  be- 
come, due  and  payable; 

(b)  Collect  and  receive  all  dividends,  interest,   income  and 
revenues  on  or  from  the  securities  pledged  hereunder; 

(c)  Personally  or  by  attorney,  sell  to  the  highest  bidder  all 
or  any  of  the  securities  pledged  hereunder  at  any  brokers'  board, 
or  at  any  public  or  private  sale,  free  from  any  claim  of  the 
Promisors  in  law  or  in  equity,  in  one  lot  and  as  an  entirety,  or 
in  separate  lots,  which  said  sale  or  sales  may  be  held  at  such 
place  or  places,  and  at  such  time  or  times  as  the  Trustee  may 
determine,  and  which  said  sale  or  sales  may  be  conducted  in  such 
manner  generally  as  the  Trustee  may  deem  to  the  best  advan- 
tage of  the  holders  of  the  notes  issued  hereunder; 

(d)  Proceed  to  protect  and  enforce  its  rights  and  the  rights 
of  holders  of  the  notes  issued  hereunder  by  a  suit  or  suits  in 
equity  or  at  law,  whether  for  the  specific  performance  of  any 
covenant  or  agreement  contained  herein  or  in  aid  of  the  execu- 
tion of  any  power  herein  granted,  or  for  the  foreclosure  of  this 
indenture,  or  for  the  enforcement  of  any  other  appropriate  legal 
or  equitable  remedy  as  the  Trustee,  being  advised  by  counsel, 

360 


INDENTURE    SECURING    BOND    ISSUE. 

shall  deem  most  effectual  to  protect  and  enforce  its  rights  and 
the  rights  of  the  holders  of  said  notes. 

Section  2.  In  case  the  Trustee  shall  have  proceeded  to  enforce 
any  right  under  this  indenture  by  foreclosure  or  otherwise,  and 
such  proceeding  shall  have  been  discontinued  or  abandoned,  for 
any  reason,  or  shall  have  been  determined  adversely  to  the  Trus- 
tee, then  and  in  every  such  case  the  Promisors  and  the  Trustee 
shall  be  restored  to  their  former  positions  and  rights  hereunder 
in  respect  of  the  securities  pledged  hereunder,  and  all  rights, 
remedies  and  powers  of  the  Trustee  shall  continue  as  if  no  such 
proceedings  had  been  taken. 

Section  3.  Whenever  any  public  sale  is  made  pursuant  to  any 
provision  of  this  indenture,  notice  of  such  sale  shall  state  the 
time  and  place,  or  times  and  places,  when  and  where  the  same  is 
to  be  made,  and  shall  contain  a  brief  general  description  of  the 
property  to  be  sold,  and  shall  be  deemed  sufficient  if  published 
once  in  each  week,  for  successive  weeks,  prior  to 

such  sale,  in  a  newspaper  published  in  the 
of 

From  time  to  time  the  Trustee  may  adjourn  any  public  sale  to 
be  made  by  it  under  the  provisions  of  this  indenture  by  announce- 
ment at  the  time  and  place  appointed  for  such  sale  or  for  such 
adjourned  sale  or  sales,  and,  without  further  notice  or  publica- 
tion, it  may  make  such  sale  at  the  time  and  place  to  which  the 
same  shall  be  so  adjourned. 

Upon  the  completion  of  any  sale  or  sales  under  this  indenture 
the  Trustee  shall  deliver  to  the  accepted  purchaser  or  purchasers 
the  shares  of  stock  or  other  property  sold  and  may  execute  suffi- 
cient transfers  thereof,  and  the  Trustee  and  its  successors  are 
hereby  appointed  the  true  and  lawful  attorney  or  attorneys  ir- 
revocable of  the  Promisors,  in  their  name  and  stead  to  make  the 
necessary  assignments,  transfers  and  conveyances  of  the  bonds, 
shares  of  stock,  or  other  property  thus  sold. 

Any  sale  or  sales  made  under  or  by  virtue  of  this  indenture, 

361 


EXHIBITS. 

whether  under  the  power  of  sale  hereby  granted  and  conferred 
or  under  or  by  virtue  of  judicial  proceedings,  shall  operate  to 
divest  all  right,  title,  interest,  claim  and  demand  whatsoever, 
either  in  law  or  in  equity,  of  the  Promisors  of,  in  and  to  the 
property  so  sold,  and  shall  be  a  perpetual  bar  both  at  law  and 
in  equity  against  the  Promisors,  their  successors  and  assigns,  and 
against  any  and  all  persons  claiming  or  to  claim  the  property  sold, 
or  any  part  thereof,  from,  through  or  under  the  Promisors,  their 
successors  or  assigns. 

The  receipt  of  the  Trustee  shall  be  a  sufficient  discharge  to  any 
purchaser  or  purchasers  of  the  property,  or  any  part  thereof,  sold 
as  aforesaid,  for  the  purchase  money;  and  no  such  purchaser, 
nor  his  representatives,  vendees  or  assigns,  after  paying  such  pur- 
chase money  and  receiving  said  receipt,  shall  be  bound  to  see  to 
the  application  of  such  purchase  money  in  accordance  with  the 
terms  of  this  indenture,  or  shall  be  bound  to  inquire  as  to  the 
authorization,  necessity  or  regularity  of  any  such  sales. 

In  case  of  any  such  sale,  whether  under  the  power  of  sale 
hereby  granted  or  pursuant  to  judicial  proceedings,  the  principal 
of  all  the  notes  issued  hereunder  and  then  outstanding,  if  not 
previously  due  by  declaration  or  otherwise,  shall  become  due  and 
payable  forthwith,  anything  in  said  notes  or  in  this  indenture  con- 
tained to  the  contrary  notwithstanding. 

The  purchase  money,  proceeds  or  avails  of  any  such  sale  or 
sales,  whether  under  the  power  of  sale  hereby  granted  or  pur- 
suant to  judicial  proceedings,  together  with  any  other  sums  which 
then  may  be  held  by  the  Trustee  or  be  payable  to  it  under  any 
of  the  provisions  of  this  indenture  as  part  of  the  trust  estate  or 
the  proceeds  thereof,  shall  be  applied  as  follows : 

(a)  To  the  payment  of  the  costs  and  expenses  of  such  sale, 
including  a  reasonable  compensation  to  the  Trustee,  its  agents, 
attorneys  and  counsel,  and  of  all  expenses,  liabilities  and  advances 
made  or  incurred  by  the  Trustee  under  this  indenture  and  to  the 
payment  of  all  taxes,  assessments  or  liens  prior  to  the  lien  of 
these  presents,  except  any  taxes,  assessments  or  other  superior 
liens,  subject  to  which  such  sales  shall  have  been  made; 
362 


INDENTURE    SECURING    BOND    ISSUE. 

(b)  Any  surplus  then  remaining,  to  the  payment  of  the  whole 
amount  owing  and  unpaid  upon  the  notes  issued  hereunder  or 
any  of  them,  for  principal  and  interest,  with  interest  at  the  rate 
of  six  per  cent  per  annum  on  the  over  due  instalments  of  interest ; 
and  in  case  such  proceeds  shall  be  insufficient  to  pay  in  full  the 
whole  amount  so  due  and  unpaid  upon  the  said  notes,  then  to  the 
payment  of  such  principal  and  interest  due  upon  said  notes,  rat- 
ably,  without  reference  or  priority  of  principal  over  interest,  or 
of  interest  over  principal,  or  of  any  instalment  of  interest  over 
any  other  instalment  of  interest; 

(c)  Any   surplus   then    remaining,    to   the    payment   to   the 
Promisors,  their  successors,  or  assigns,  or  whomsoever  may  law- 
fully be  entitled  to  receive  the  same. 

Section  4.  Upon  any  such  sale  of  the  securities,  or  any  part 
thereof,  pledged  hereunder  or  any  part  thereof  whether  under  the 
power  of  sale  hereby  granted  and  conferred,  or  pursuant  to 
judicial  proceedings,  any  purchaser,  in  settlement  or  payment  of 
the  purchase  price  of  the  property  purchased,  shall  be  entitled 
to  use,  and  apply  toward  the  payment  of  the  purchase  price,  any 
notes  issued  hereunder  and  any  matured  and  unpaid  coupons  ap- 
pertaining thereto,  by  presenting  such  notes  and  coupons  in  order 
that  there  may  be  credited  thereon  the  sums  applicable  to  the  pay- 
ment thereof  under  section  3  of  this  Article ;  and  such  purchaser 
thereupon  shall  be  credited,  on  account  of  such  purchase  price 
payable  by  him,  with  the  sums  so  applicable  to  the  payment  of, 
and  credited  on  the  notes  or  coupons  so  presented;  and,  at  any 
such  sale,  any  holders  of  the  notes  issued  hereunder  or  the  Trus- 
tee may  bid  for  and  purchase  such  property,  and  may  make  pay- 
ment therefor  as  aforesaid,  and,  upon  compliance  with  the  terms 
of  sale,  may  hold,  retain  and  dispose  of  such  property  without  fur- 
ther accountability. 

Section  5.  No  holder  of  any  note  issued  hereunder  shall  have 
any  right  to  institute  any  suit,  action  or  proceeding  in  equity  or 
at  law  for  the  foreclosure  of  this  indenture,  or  for  the  execu- 
tion of  any  trust  or  power  hereof  or  for  any  other  remedy  here- 

363 


EXHIBITS. 

under,  or  in  respect  of  the  securities  pledged  hereunder,  unless 
such  holder  previously  shall  have  given  to  the  Trustee  written 
notice  of  default  and  of  the  continuance  thereof  for  the  period, 
if  any,  specified  therefor  as  in  section  1  of  Article  Fourth  of 
this  indenture ;  nor  unless,  also,  the  holders  of  a  majority  in 
interest  of  the  notes  issued  hereunder,  then  .outstanding,  shall 
have  made  written  request  upon  the  Trustee  after  the  happening 
of  such  default,  and  the  continuance  thereof,  if  any,  as  afore- 
said, and  shall  have  afforded  to  it  a  reasonable  opportunity  either 
to  proceed  to  exercise  the  powers  of  sale  hereinbefore  granted 
or  to  institute  such  action,  suit  or  proceeding  in  its  own  name, 
nor  unless,  also,  they  shall  have  offered  to  the  Trustee  adequate 
security  and  indemnity  against  the  costs  and  expenses  to  be  in- 
curred therein  or  thereby ;  and  such  notification,  request  and  offer 
of  indemnity  are  hereby  declared,  in  every  such  case,  at  the  option 
of  the  Trustee,  to  be  conditions  precedent  to  the  execution  of 
the  powers  and  trusts  of  this  indenture,  and  to  any  action  or 
cause  of  action  for  foreclosure  or  for  any  other  remedy  here- 
under; it  being  understood  and  intended  that  no  one  or  more 
holders  of  notes  shall  have  any  right  in  any  manner  whatever  to 
affect,  disturb  or  prejudice  the  lien  of  this  indenture  by  his  or 
their  action,  or  to  enforce  any  right  hereunder,  except  in  the 
manner  herein  provided,  and  that  all  proceedings  hereunder  at 
law  or  in  equity  shall  be  instituted,  had  and  maintained  in  the 
manner  herein  provided  and  for  the  equal  benefit  of  all  holders 
of  such  outstanding  notes.  In  no  event  shall  the  custody  and 
holding  of  the  securities  pledged  hereunder  be  in  anywise  dis- 
turbed. But  the  foregoing  provisions  of  this  section  shall  not  be 
construed  to  affect  any  discretion  or  power  by  any  provision  of 
this  indenture  given  to  the  Trustee  to  determine  whether  or  not 
it  shall  take  action  in  respect  of  any  default  without  such  notice 
or  request  from  the  note  holders,  or  affect  any  other  discretion 
or  power  given  to  the  Trustee. 

Section  6.     Except  as  herein  expressly  provided  to  the  con- 
trary, no  remedy  herein  conferred  upon  or  reserved  to  the  Trus- 
tee, or  to  the  holders  of  notes  issued  hereunder  is  intended  to 
be  exclusive  of  any  other  remedy,  but  each  and  every  such  remedy 
364 


INDENTURE    SECURING    BOND    ISSUE. 

shall  be  cumulative,  and  shall  be  in  addition  to  every  other  remedy 
given  hereunder  or  now  or  hereafter  existing  at  law  or  in  equity 
or  by  statute. 

Section  7.  No  delay  or  omission  of  the  Trustee,  or  of  any 
holders  of  notes  issued  hereunder,  to  exercise  any  right  or  power 
accruing  upon  any  default  continuing1  as  aforesaid,  shall  impair 
any  such  right  or  power,  or  shall  be  construed  to  be  a  waiver  of 
any  such  default,  or  an  acquiescence  therein  or  shall  extend  to 
any  subsequent  default;  and  every  power  and  remedy  given  by 
this  Article  to  the  Trustee,  or  to  the  holders  of  the  notes,  may  be 
exercised  from  time  to  time,  and  as  often  as  may  be  deemed  ex- 
pedient, by  the  Trustee  or  by  the  holders  of  the  notes. 

ARTICLE  FIFTH. 

Anything  to  the  contrary  herein  notwithstanding,  it  is  expressly 
understood  and  agreed  that  this  indenture  and  the  notes  issued 
hereunder  are  executed  by  the  Promisors,  not  individually,  but 
as  Trustees  under  the  agreement  and  declaration  of  trust  herein- 
before mentioned,  dated  ,19  ,  to  which 
reference  is  hereby  made,  and  that  any  and  all  liability  of  the 
Promisors  shall  be  expressly  and  strictly  limited  to  the  application 
and  distribution,  in  accordance  with  the  provisions  of  said  agree- 
ment and  declaration  of  trust,  and  hereof,  of  the  property  from 
time  to  time  constituting  the  trust  estate,  and  any  and  all  per- 
sonal liability  of  the  Promisors  (except  as  aforesaid),  the  Execu- 
tive Committee,  the  shareholders  and  all  beneficiaries  under  said 
agreement  as  therein  mentioned,  is,  by  the  acceptance  of  said 
notes  and  as  a  consideration  for  the  issue  and  execution  thereof 
and  of  this  indenture,  expressly  waived  by  the  holders  of  any 
and  all  notes  issued  hereunder;  it  being  further  understood  and 
agreed  that  the  payment  of  the  principal  of  and  the  interest  on 
said  notes  shall  only  be  sought  for  and  enforcible  against  and 
collected  out  of  the  property  from  time  to  time  constituting  the 
trust  estate  created  by  said  agreement  and  declaration  of  trust. 

ARTICLE  SIXTH. 

Section  1.    From  time  to  time,  the  Promisors  as  trustees  under 

365 


EXHIBITS. 

the  said  agreement  and  declaration  of  trust,  dated  , 

19  ,  may  execute,  and  may  file  with  the  Trustee,  a  writing  ap- 
pointing any  person  or  persons,  or  any  copartnership  or  corpora- 
tion, the  agent  or  agents  of  the  Promisors,  under  such  designa- 
tion as  they  may  determine  and  specify,  in  the  name,  place  and 
stead  of  the  Promisors,  to  sign  any  note  or  coupon  to  be  issued 
under  this  indenture,  or  to  sign  any  order  or  authority  to  deliver 
any  such  note,  when  authenticated,  or  to  sign  any  other  order 
or  authority  which  the  Promisors  themselves  might  sign;  and 
thereupon  the  Trustee  shall  be  authorized  to  authenticate  any  note 
or  notes  authorized  to  be  issued  hereunder,  which  shall  have  been 
signed  by  such  agent  or  agents  in  the  name  of  the  Promisors,  and 
to  deliver  any  such  note,  when  authenticated,  upon  the  order  in 
writing  of  such  agent  or  agents,  or  to  release  and  surrender  any 
or  all  the  securities,  pledged  hereunder,  and  to  do  and  perform 
any  act  or  to  take  any  proceeding  which,  pursuant  to  the  provi- 
sions of  this  indenture,  the  Trustee  is  authorized  to  perform  or 
to  take  upon  the  written  order  of  the  Promisors. 

From  time  to  time  the  Promisors  may  revoke  any  such  appoint- 
ment previously  made,  and  may  appoint  a  substitute  or  substitutes 
with  like  power  and  authority;  but  no  such  revocation  shall 
operate  to  annul,  or  in  anywise  to  affect,  any  act  or  proceeding 
done  or  taken  by  any  agent  or  agents  previous  to  such  revoca- 
tion of  authority  and  service  of  notice  in  writing  thereof  upon 
the  Trustee,  or  shall  operate  to  annul,  or  in  anywise  to  affect, 
any  act  or  proceeding  done  or  taken  by  the  Trustee  pursuant  to 
the  order  of  any  agent  or  agents  appointed  or  theretofore  ap- 
pointed as  provided  in  this  sectnon,  of  the  revocation  of  whose 
authority  notice  in  writing  shall  not  have  been  given  to  the 
Trustee  as  aforesaid. 

and  are  each 

hereby  appointed  the  agent  of  the  Promisors,  as  trustees  under 
said  agreement  and  declaration  of  trust  dated  , 

19  ,  in  behalf  of  the  Promisors,  and  under  the  designation  of 
"Assistant  Treasurer"  to  sign  any  note  authorized  to  be  issued 
under  this  indenture,  and  until  the  revocation  of  his  appoint- 
ment as  such  agent  in  the  manner  above  provided,  each  one  of 
366 


INDENTURE    SECURING    BOND    ISSUE. 

them  may  and  is  authorized  to  exercise  the  aforesaid  powers  of 
such  agent  under  the  designation  above  specified,  without  any 
further  act  or  appointment  hereunder.  The  fac-simile  signature 
of  either  of  such  agents  under  the  designation  of  "Assistant 
Treasurer"  is  hereby  adopted  for  the  purpose  of  authenticating 
the  coupons  appertaining  to  said  notes. 

The  death  of  the  Promisors,  or  any  of  them,  or  of  any  suc- 
cessor to  them,  shall  not  operate  to  revoke  any  agency  created 
pursuant  to  the  provisions  of  this  section. 

Section  2.  For  every  purpose  of  this  indenture,  including  the 
execution,  issue  and  use  of  any  and  all  notes  hereby  secured,  the 
term  "Promisors"  includes  and  means  not  only  the  parties  of 
the  first  part  hereto  but  also  their  successors  as  trustees  under 
the  said  agreement  and  declaration  of  trust,  dated 
19  ,  and  the  survivors  or  survivor  of  them.  Such  successors 
and  such  survivors  and  survivor  shall  possess  and  from  time  to 
time  may  exercise  each  and  every  right  and  power  hereunder 
of  the  Promisors,  in  the  name  of  the  Promisors  or  of  the  said 
successors,  survivors  or  survivor. 

Whenever  any  Trustee  shall  cease  to  act  as  such  under  the 
agreement  and  declaration  of  trust,  dated  , 

19  ,  he  shall  without  any  further  act,  cease  to  be  a  Promisor 
hereunder,  and  the  election  of  any  successor  Trustee  under  said 
agreement  and  declaration  of  trust,  dated  , 

19  ,  shall,  without  any  further  act,  constitute  such  successor 
a  Promisor  hereunder,  as  if  herein  specifically  mentioned  as  one 
of  the  parties  of  the  first  part. 

Section  3.  This  agreement  shall  be  deemed  to  be  and  shall 
be  construed  as  a  contract  of  the  State  of  , 

and  all  the  rights  of  the  parties  hereto  and  of  the  holders  of 
the  notes  issued  hereunder  shall  be  governed  and  determined 
according  to  the  laws  of  the  State  of 

Section  4.     This  indenture  is  executed  in  counter 

parts  each  of  which  so  executed  shall  be  deemed  to  be  an  origi- 

367 


EXHIBITS. 

nal,  and  such  counterparts  shall  together  constitute  but  one  and 
the  same  instrument. 

IN  WITNESS  WHEREOF,  at  the 

of  ,  in  the  State  of  , 

,  ,  and 

,  as  Trustees  under  said  agreement  and 

declaration  of  trust  dated  ,  19         , 

and  as  parties  hereto  of  the  first  part,  have  hereunto  caused  their 
names  and  seals  to  be  hereunto  affixed,  and 
Trust  Company,  party  hereto  of  the  second  part,  in  token  of 
the  acceptance  of  the  trust  hereby  created,  has  caused  this  agree- 
ment to  be  signed  by  its  President  or  Vice-President  and  its  cor- 
porate seal  to  be  hereunto  affixed  and  attested  by  its  Secretary 
or  an  Assistant  Secretary  as  of  the  day  and  year  first  above 
written. 

(L.  S.) 

(L.  S.) 

(L.   S.) 

As    Trustees   under   the   agreement   and 

declaration  of  trust,   dated 

19         ,  creating  the  trust  therein  called 

the  Company,  and 

not  individually. 

Trust   Company. 

By  , 

President. 
Attest : 


Secretary. 
Acknowledgments  before  Notary. 


368 


t 

MINUTES  OF   CESTUIS'    MEETING. 


FORM  OF  CESTUIS'  MEETING,  PURSUANT  TO  NOTICE,  WHICH  WAS 
GIVEN  IN  ACCORDANCE  WITH  THE  AGREEMENT  OF  TRUST. 

The  annual  meeting  of  the  shareholders,  i.  e.,  cestuis  que 

trust ent,  of  the  was  held  at  the  time  and  place  named 

in  said  notice  ,  namely,  on  , 

19       ,  at  o'clock.     President  in 

the  chair. 

The  Secretary  read  the  call  for  the  meeting. 

The  records  of  the  last  annual  meeting  of  the  shareholders, 
held  ,  were  read  and  approved. 

On  motion  duly  made  and  seconded,  it  was 

VOTED  that  a  committee  of  three  be  appointed  by  the  chair 
to  examine  all  proxies  and  receive,  sort  and  count  all  votes  at 
the  meeting. 

The  chair  appointed  as  such  committee  Messrs. 
On  motion  duly  made  and  seconded,  it  was 

VOTED  that  the  reading  of  the  annual  report 

of  the  trustees  to  the  shareholders  be  dispensed  with,  and  that 
said  report  be  accepted,  approved  and  placed  on  file. 

(Copy  of  the  report  is  annexed  to  record  of  the  meeting.) 
On  motion  duly  made  and  seconded,  it  was 

VOTED  to  proceed  to  the  election  by  written  or  printed  bal- 
lots of  trustees  to  serve  for  the  term  of  

years  next  ensuing. 

The  ballots  being  cast,  were  collected  and  counted  by  the 

369 


EXHIBITS. 

committee    previously    appointed,    which    committee    reported, 
through  its  chairman  as  follows : 

That  the  number  of  votes  cast  was: 
Preferred  Shares 
Common  Shares 

Total  and 

that  the  following  persons  had  thus  received  the  total  number  of 
votes  cast,  namely, 

The  total  number  of  shares  outstanding  being  as  follows: 

Preferred 

Common 

Total 

And  the  number  necessary  for  a  quorum  and  an  election  being 
,  the  chair  declared  the  above  named  per- 
sons duly  elected  to  serve  for  the  term  of  years  next  en- 
suing. 

On  motion  duly  made  and  seconded,  it  was 

VOTED  that  the  acts  and  doings  of  the  trustees  for  the  past 
year,  as  the  same  appear  of  record  be  approved,  ratified  and  coa- 
firmed. 

No  further  business  having  come  before  the  meeting  it  was 

VOTED  that  the  annual  meeting  of  the  share- 

holders of  the  ,  be  dissolved. 

And  the  meeting  was  accordingly  dissolved. 
A  true  record 


370 


GENERAL    INDEX. 

All  references  to  provisions  in  Exhibits  are  under  the  title  "Exhibits". 
(The  references  to  text  are  by  sections,  the  exhibits  by  pages.) 

A. 
ACCOUNTING, 

general  rights  of  cestui,  §  135. 

provisions  in  instrument  for,  §  168. 

right  to,  not  incident  to  death  of  cestui,  §  21. 

ACCUMULATION, 

statutes  against,  §  94. 

ACTIONS, 

cestuis  as  parties,  §  107. 

foreign  jurisdiction,  §§  103,  104. 

liability  of  trust  estate,  §  106. 

statutory  and  express  trustees  distinguished,  §  105. 

trustees  as  plaintiffs,  §  102. 

trustees  parties  defendant,  §§  100,  101. 

trustee  principal  and  not  agent,  §  99. 

ACTIVE  TRUSTS, 

distinguished  from  dry  or  active,  §  17. 
settlors  own  benefit,  §§  22,  23,  24. 

AGENTS, 

control  of  by  trustees,  §  161. 
trustee,  action  against,  §  99. 
trustees  not,  §§  26,  27. 

ALIENATION, 

suspension  of,  §§  89-98. 
suspension,  lawful  period,  §  95. 

371 


INDEX. 

(The  references  to  text  are  by  sections,  the  exhibits  by  pages.) 

AMENDMENT, 

of  trust  agreements,  §  170. 

APPLICATION 

of  trust  funds,  obligation  of  third  persons  to  see  to,  §  155, 
clause  10. 

"ANTI-TRUST" 

laws,  §  2. 

APPOINTMENT, 

trustees  terms,  §  118. 
occasion  of,  §  119. 

ASSIGNMENT, 

by  corporation,  §   148. 

deed  of,  creditors  as  cestuis,  §  71. 

ASSOCIATION, 

articles  creating  trust  estate,  English  ruling,  §  10,  11. 
American  cases,  §  12. 

B. 
BANKRUPTCY, 

trust  estate  not  subject  to,  §  149. 

BENEFICIARIES, 
see  "cestuis". 

BOOK, 

plan  of  treatment,  §  3. 
purpose  of,  §  1. 

BOOKS, 

examination  of,  see  "Information". 


372 


INDEX. 

(The  references  to  text  are  by  sections,  the  exhibits  by  pages.) 

"BUBBLE  ACT," 
§§  51-53. 
not  applied  in  America,  §  66. 

C. 

CESTUIS, 

as  parties  to  actions,  §  107. 

creditors  as,  §  64. 

creditors,  deed  of  assignment,  §  71. 

devisees,  §  65. 

devisees,  non-liability  of,  §  70. 

foreign  trust,  taxation,  §  112. 

holders  of  certificates  of  shares,  §  86. 

interests  of,  protected,  §§   132-144. 

meetings  of,  §  144. 

need  not  be  under  any  disability,  §  89. 

non-liability  of  to  creditors,  §§  74-77.  ^ 

for  trustees'  tort,  §  34. 

proportional   contributors,   §   (53. 

receipts  to  trustee,  effect  of,  §  144. 

relations  inter  sese,  §§  83,  84. 

rights  against  trustee,  §  85. 

right  to  appoint  and  remove  trustees,  §  118. 

right  to  information,  §  141. 

settlors  of,  trust  estate,  §  9. 

shareholders  as,  §§  62,  78-79. 

taxation  of,  §§  111-113. 

trustees  as,  §  140. 

CERTIFICATES  OF  SHARES, 

as  evidence  of  rights,  §  62. 
cestuis,  owners,  §  86. 
non-holders  of,  §  73. 
status  of  holders,  §  135. 
without  par  value,  §  166. 

373 


INDEX. 

(The  references  to  text  are  by  sections,  the  exhibits  by  pages.} 
CLASSIFICATION  OF  TRUSTEES,  §  117. 

COLLATERAL, 

using  trust  shares  as,  §  143. 

COMBINES  IN  RESTRAINT  OF  TRADE,  §  2. 

COMPENSATION, 

of  trustees,  §§  131,  131o. 

COMMON  shares,  see  "shares". 

CONTRACTS, 

non-liability  of  cestuis,  §§  74,  75,  76,  77. 
special  provision  against  personal  liability,  §  49. 
stipulation  for  trustees'  indemnity,  §  159. 

CONTRIBUTIONS, 

non-certificate  holding,  §  73. 

CONTRIBUTORS, 

proportional  interest,  §  63. 

CORPORATION, 

assignments  and  preferences,  §  148. 

assets  as  trust  funds,  §  147. 

capacity  at  domicile,  §§  127,  128. 

disadvantages  of,  §§  1,  2a. 

effect  upon,  by  changing  statutes,  2a. 

examination  of  books  by  stockholder,  §  134. 

excise  taxes,  §  110. 

liability  of  directors  to  stockholders,  §  137. 

over-capitalization,  evils  of,  §  163. 

relation  of  stockholders  to,  §  136. 

status  of  stockholders,  §  133. 

unpaid  subscriptions,  §§  150,  151. 

374 


INDEX. 

(The  references  to  text  are  by  sections,  the  exhibits  by  pages.) 

CO-TRUSTEES, 

see  "trustees". 

COURTS, 

advisory  power  as  to  trustees,  §§  123-126. 

CREDITORS, 

cestuis  as,  §  64. 

deed  of  assignment,  cestuis,  §  71. 

liability  of  trustee,  §  68. 

"lien"  on  trust  assets,  §  40. 

pursuit  of  trust  fund,  §  146. 

pursuit  of  trustees'  right  of  indemnity,  §  39. 

reaching  income  of  cestui,  §§  14,  15. 

trusts  for  debtor  and  them,  §§  5-8. 

D. 
DEBTOR, 

cestuis  himself  and  creditors,  §§  5,  6,  7,  8. 

DEBTS, 

see  liabilities. 

DECLARATIONS  OF  TRUST, 
see  trust  agreements. 

DEVISEES, 

cestuis,  §  65. 

trading  trust,  non-liability,  §  70. 

DIRECTORS, 

see  corporation. 


375 


INDEX. 

(The  references  to  text  are  by  sections,  the  exhibits  by  pages.) 

DIVIDENDS, 

of  trust  estate  in  business,  §   130. 
suit  for,  by  cestuis,  §  85. 

DRY  TRUSTS, 

distinguished  from  active,  §  17. 
for  settlor's  own  benefit,  §§  20,  21. 

E. 
ELECTION, 

of  trustees'  successors,  §  120. 

EXHIBITS, 

(References  to  exhibits  are  by  pages.) 

agreement  by  trustees  to  holders  of  certificates,  p.  287. 
amendment  of  trust  agreement,  pp.  284,  285,  298. 
amendment  of  trust  agreement,  limitations  thereon,  p.  337. 
amendment  of  trust  investment,  p.  316. 
annual   meeting    and    special    meetings  of    shareholders, 

pp.  288,  313. 
minutes  of,  pp.  369-370. 
application  of  trust  funds,  third  person  not  bound  to  see 

to,  pp.  289,  305,  331,  362. 
by-laws,  adoption  of  by  trustees,  p.  330. 
cestuis'  meetings,  form  of,  pp.  369-370. 
cestuis'  exemption  from  personal  liability,  p.  297. 
certificates  without  par  value,  form  of,  p.  339. 
classes  and  terms  of  trustees,  p.  288. 
common  and  preferred  shares,  p.  307. 
converting    corporation    into    trust    estate,    preliminary 

agreement,  pp.  321-325. 

death  of  shareholder  or  trustee,  effect  thereof,  p.  335. 
dividends,  declaration  and  payment  of,  pp.  294,  296,  313, 

333. 


376 


INDEX. 

(The  references  to  text  are  by  sections,  the  exhibits  by  pages.) 

election  of  trustees,  pp.  302,  328. 

election  of  officers  by  trustees  and  their  power,  p.  305. 

executive  committees,  p.  306. 

exemption  of  shareholders  from  personal  liability,  p.  314. 

fiscal  year  and  annual  meetings,  p.  296. 

form  of  bond  and  coupons,  pp.  348-351. 

form  of  certificates,  pp.  308-311. 

holding  company,  pp.  286-300. 

increase  of  shares,  p.  332. 

increase  or  reduction  of  shares,  p.   312. 

indenture  to  secure  issue  of  bonds  of  trust,  pp.  348-368. 

legal  title,  control  and  management    vested  in    trustees, 

p.  288. 

liabilities,  stipulations  in  contracts  against,  p.  298. 
lost  certificate,  p.  313. 
manufacturing  company,   pp.   301-320. 
meetings  and  quorums  of  trustees,  p.  330. 
Merchants'     Bank,    plan    of    Alexander    Hamilton,    pp. 

340-347. 

name  of  company,  pp.  280,  287,  302,  341. 
notices  of  meetings  and  calls,  method  of  making,  pp.  281, 

334. 

number  and  classes  of  trustees,  pp.  287,  302,  320. 
obligation  by  subscribers,  p.  282. 
officers'  election  of  by  trustees  and  defining  their  duties, 

trustees'  compensation,  p.  331. 
powers  of  trustees,  pp.  303-304,  328-329. 
powers  of  trustees  in  real  estate  trust,  p.  279. 
provisions  for  sale  on  mortgage,  p.  282. 
real  estate  trust,  pp.  279-285. 
recording  of  declaration  and  amendments,  p.  336. 
regulations  as  to  inspection  of  books   by    shareholders, 

p.  316. 

resignation  and  death  of  trustees,  p.  328. 
shareholder — death  of,  trustee — death  of,  p.  297. 

377 


INDEX. 

(The  references  to  text  are  by  sections,  the  exhibits  by  pages.) 

shareholders'  exemption  from  personal  liability,  trustees' 

exemption  from  personal  liability,  p.  335. 
shareholders'  meetings,  annual  and  special,  pp.  328,  334. 
liability,   stipulation  against,  p.   344. 
special  meetings,  p.  297. 
voting  personally  and  by  proxy,  p.  281. 
shares,  common  and  preferred,  pp.  294,  328. 
without  par  value,  pp.  328,  339. 
forms  of  certificates,  pp.  291-295. 
original  and  additional,  p.   332. 
to  be  personal  property,  p.  314. 

stated  meeting  by  trustees,  adoption  of  by-laws,  p.  305. 
stipulation  against  personal   liability  "stamped"   on  con- 
tracts, pp.  337-338. 
stipulations  making  trust  estate  liable  on  trust  contracts, 

p.  315. 

subscriptions,  provisional  on  amount  subscription,  p.  283. 
termination  of  trust,  pp.  336,  346. 
transfer  of  shares,  p.  343. 
transferability  of  shares,  p.  312. 
trust  term,  p.  282. 
trust  term  and  winding  up,  p.  298. 
trust  term  and  extension  thereof,  p.  315. 
trustees'  compensation,  p.  281. 
trustees,   election   of   officers,   and    vesting  of   authority, 

p.  290. 

filling  vacancies,  p.  282. 
insurance    for  personal   protection,   p.   332. 
meetings,  called  by,  p.  281. 
non-liability   for  error  of  judgment,    pp.   306, 

291,  331. 
provision  for  exemption  from  personal  liability, 

p.  315. 

right  to  issue  additional  shares,  p.  295. 
stated  meetings,  by-laws  of,  p.  290. 
unpaid  subscriptions,  installments  on,  p.  280. 

378 


INDEX. 

(The  references  to  text  are  by  sections,  the  exhibits  by  pages.) 

EXTENSION, 

of  trust  term,  §  96. 

F. 

FOREIGN  CORPORATIONS, 
see  corporations. 

FORMS, 

see  Exhibits. 

I. 
INDEMNITY, 

torts  of  trustee,  §§  41,  42,  43,  44. 
trustees'  right  to,  §§  39,  40. 
stipulation  for,  §  159. 

INFORMATION, 

right  of  cestui  to,  §  141. 
motive  in  seeking,  §  142. 
restraint  on  right  to,  §  142. 

INSURANCE, 

protection  of  to  trustees,  creditors  and  cestuis,  §  160. 

INVESTMENT, 

temporary,  by  trustees,  §  162. 

J- 

JOINT  LIABILITY, 

see  "Liability". 

JOINT-STOCK  COMPANIES, 

see  unincorporated  associations. 

379 


INDEX. 

(The  references  to  text  are  by  sections,  the  exhibits  by  pages.) 

L. 
LIABILITY, 

of  trust  estate,  §  69. 

of  trust  estate,  express  provision,  §§  46,  47. 
of  trustees  joint  and  several,  §  121. 
.     of  trustee,    stipulation  against,  §§  29,  30,  31,  32. 
negligence  by  trustee,  §§  33,  34,  35,  36. 
personal,  of  trustee,  §  28. 
see  also  non-liability. 

M. 
MANAGEMENT, 

negligence  of  trustee,  §§  33-36. 

MAJORITY, 

management  by  trustees,  §  117. 

MONOPOLIES, 
illegal,  §  2. 

MEETINGS, 

of  cestuis,  §  144. 

MORTGAGES, 

by  trustees,  §  169. 

N. 
NAME, 

adoption  of,  for  trust  estate,  §  158. 

NEGLIGENCE, 

of  trustee,  §§  33-36. 

NON-LIABILITY, 

cestuis,  contracts  of  trustees,  §§  74-75,  76,  77. 
devisees,  trading  trust,  §  70. 

380 


INDEX. 

(The  references  to  text  are  by  sections,  the  exhibits  by  pages.} 

NOTE, 

by  trustees,   proper   stipulation   in   against   personal   lia- 
bility, §  30. 

NOTICE, 

recording  of  trust  agreement  as,  §  172. 

P. 
PARTIES, 

actions  of  statutory  and  express  trustees,  §  105. 
foreign  jurisdiction,  §§  103,  104. 
trustees  as  plaintiffs,  §  102. 
trustees,  action  against,  §§  100,  101. 

PARTITION, 

restraint  upon,  §  97. 

PARTNERSHIPS, 

shareholders,  §§  83-84. 

PASSIVE  TRUSTS, 
see  "dry  trusts". 

PERPETUITIES,  §§  89-98. 

PERSONAL  RESPONSIBILITY, 

corporations  and  trusts  compared,  §  2c. 
see  also  "cestuis"  and  "trustees". 

PLEDGE, 

see  collateral. 

PRECEDENTS, 

see  Exhibits. 


381 


INDEX. 

(The  references  to  text  are  by  sections,  the  exhibits  by  pages.) 

PREFERENCES  TO  CREDITORS, 
By  corporations,  §  148. 
cannot  be  made  by  trustees,  §  146. 

PREFERRED  SHARES, 
see  "shares". 

PRINCIPAL, 

trustee  is,  §§  26,  27. 

PURPOSES, 

trust  estate  in  business,  variety  and  extent,  §  157. 

R. 

REAL  ESTATE  TRUSTS,  §§  24,  153. 

RECORDING, 

trust  agreement,  §  172. 

REINVESTMENT, 

suspension  of  alienation,  §  93. 

REMAINDERMAN, 

right  to  a  "stock"  dividend,  §  130. 

REMOVAL  OF  TRUSTEES,  §  85. 

REPORTS, 

as  protection,  §  132. 

provisions  in  trust  instrument  for,  §  168. 

see  also  "information". 

RESPONSIBILITY, 

legitimate  escape  of,  §  2. 

382 


INDEX. 

(The  references  to  text  are  by  sections,  the  exhibits  by  pages.) 

RESTRAINTS, 

upon  alienation,  §§  89-98. 
upon  partition,  §  97. 

REVOCABILITY, 

with  reference  to  restraints  on  alienation,  §§  92,  926. 

S. 
SALARIES, 

see  "compensation". 

SETTLORS, 

active  trusts  for  own  benefit,  §§  22,  23,  24. 

dry  trust  for  their  benefit,  §§  20,  21. 

estates  for  self  and  others,  §§  5,  6,  7,  8. 

for  own  benefit,  §§  9,  15,  16. 

trusts  for  self  and  another,  §  19. 

trust,  for  own  benefit,  perpetuities,  §  89. 

SHAREHOLDERS, 

cestuis  as,  §  62. 

partners  or  not,  §§  83,  84. 

unincorporated  association,  liability  of,  §  80. 

see  also  "cestuis". 

SHARES, 

in  trust  without  par  value,  §  166. 
preferred  in  trust  estate,  §  167. 
see  also  "transferable  shares". 

STIPULATION, 

personal  liability  of  trustee  exempted  by,  §§  29,  30,  31,  32. 
when  oral,  burden  of  proof,  §  29. 

383 


INDEX. 

(The  references  to  text  are  by  sections,  the  exhibits  by  pages.) 

STOCKHOLDERS, 

see  corporations. 

SUBSCRIPTIONS, 

unpaid,    trust    estates    and    corporations    distinguished. 
§§  150,  151. 

SUITS, 

see  Actions. 

T. 
TAXATION, 

double  prohibited,  §  111. 

excise  tax,  §  110. 

foreign  trusts,  resident  cestui,  §  112. 

TERMINATION, 

voluntary,  of  trust  estate,  §  171. 

TORTS, 

insurance  against  liability  for,  §  160. 

liability  of  trustees,  §§  33-36. 

right  of  trustee  to  indemnity,  American  cases,  §§  41-44. 

TRADE, 

trust  in,  transferable  shares,  §§  55-61. 
trust  estates  embarked  in,  debts,  §  48. 

TRANSFERABLE  SHARES, 

collateral  security,  §  143. 
trading  trust,  §§  55-61. 
unincorporated  associations,  §§  52,  53. 


384 


INDEX. 

(The  references  to  te.vt  are  by  sections,  the  exhibits  by  pages.  > 

TRUST  AGREEMENT, 

amendment,  §   170. 

contents  of,  §§  153,  171. 

general  directions  in,  §  155. 

recording  of,  §  172. 

unnecessary  detail  to  be  avoided,  §  156. 

TRUST  ESTATE, 

adoption  of  name,  §  158. 

assets,  its  capital,  §§  164,  165. 

distribution  of  earnings,  $  130. 

history  of  as  business  companies,  §§  153,  154. 

in  business,  uses  of,  §  2b. 

liability  under  express  provision,  §§  46,  47. 

liability  of,  §  69. 

not  subject  to  bankruptcy,  §  149. 

preferred  shares  in,  §  167. 

publicity — reports — accounting,  §   168. 

shares  in,  §  166. 

status  of,  §  14. 

status  of  settlors'  benefit,  §§  15,  16. 

statement  of  purposed,  §  157. 

stipulation  in  trust  instruments,  §§  153-171. 

voluntary  termination,  §  171. 

TRUST  FUND, 

corporate  assets,  §  147. 
inviolability  of,  §§  145-152. 
pursuit  of  by  creditor,  §  146. 

TRUST  METHOD, 

advocacy  of,  §  2. 

TRUST  TERM, 

extension,  §  96. 


385 


INDEX. 

(The  references  to  text  are  by  sections,  the  exhibits  by  pages.) 

TRUSTEES, 

actions  in  foreign  jurisdiction,  §§  103,  104. 

statutory    and    express,    trustees     distinguished, 

§   105. 

appointment  and  terms,  §  118. 
as  managers,   §§   115-131a. 
care  of  cestuis,  §  140. 
compensation,   §§    131,    13  la. 
creditors',  liability  to,  §  68. 
defaults  of  co-trustees,  §  122. 
direction  by  courts,  §§  123,  124,  125. 
discretion,  control  of,  by  courts,  §  117. 

importance   of   being   uncontrolled  by   cestuis, 

§§  3,  60. 

dry  trust,  duties  of,  §  17. 
election  of,  §  120. 

embarked   in   trade,   transferable   shares,    §§    55-61. 
emergency,  cases  of,  right  of  single  trustee  to  act,  §  117. 
employment  of  agents,  §  161. 
independent  status,  §§  26,  27. 
information  to  cestuis,  §   141. 
insurance  against  loss,  §  160. 
liability,  joint  and  several,  §  121. 
liability  of  cestuis,  §  85. 

liability  to  unincorporated   association,    §    87. 
liability  stringent,  §  28. 
management  by  majority,  §  117. 
mortgages  by,  §  169. 
occasion  of  appointment,  §  119. 

parties  defendant,  and  as  plaintiffs,  §§  100,  101,  102. 
personal  liability,  stipulation  against,  §§  29,  30,  31,  32. 
purchasing  trust  assets,  "dummies,"  §  139. 
ratification  by,  §  117. 
receipts  from  cestuis,  effect  of,  §  144. 
removal  of,  §  85. 


386 


INDEX. 

(The  references  to  text  are  by  sections,  the  exhibits  by  pages.} 

reports  required  by  trust  instrument,  §  142. 

right  to  indemnity,  §§  39,  40. 

special  contract  against  personal  liability,  §  49. 

stipulation  for  indemnity,  §  159. 

trustees  doing  business  abroad,  §§  128,  129. 

temporary  investments  by,  §  162. 

tort,  right  of  indemnity,  American  cases,  §§  41,  42,  43,  44. 

unity  of  management,  §  116. 

TRUSTS, 

embarking  in  trade,  debts,  §  48. 
for  settlors  and  another,  §  19. 
passive  and  active  distinguished,  §  17. 
settlors'  benefit,  perpetuities,   §   89. 

U. 

UNINCORPORATED  ASSOCIATIONS, 

common  law,  §  51. 
transferable  shares,  §§  52,  53. 
liability  of  shareholders,  §  80. 
liability  of  trustee  to,  §  87. 

UNINCORPORATED  COMPANY, 

articles  of  association,  English  ruling,  §§  10,  11. 
American  cases,  §  12. 

W. 

WILLS, 

creating  business  trust,  §  4. 
devisees  as  ccstuis,  §  65. 


387 


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